University, a house deposit and a wedding are all important milestones – but rising costs mean they’re increasingly unattainable.
University could set a young person back £60,000, while they will have to save an average of £50,000 for a house deposit and £20,000 for a wedding.
More parents and grandparents are looking to help their loved ones to reach these goals in the future by setting aside money each month.
A Junior Isa (Jisa) is a popular tax-efficient vehicle to grow your child’s pot over 18 years, particularly if you choose to invest your cash.
We look at how Jisas work, whether a Jisa is a good option for you and how much you’d have to put away each month to meet your specific goals.
Future proofing: Parents can put money into a Jisa to save for things like university
What are the Junior Isa rules?
Like an adult Isa, Jisas have both cash and stocks and shares options.
On a cash Jisa all interest earned is shielded from tax, while those putting money into a stocks and shares Jisa will not have to pay tax on dividends or capital gains.
Jisas are for those aged under 18 who live in the UK and are usually opened by parents, but grandparents and others can pay in too.
The £9,000 annual allowance is slightly below the standard £20,000 for standard Isas, but it is separate from an adult’s personal allowance.
If you’re set on putting money aside for a specific goal, then a stocks and shares Jisa is a good option because you’re investing over a longer-term horizon.
While keeping it in cash can be a lower risk option, putting aside money over 18 years means it’s likely to lose money thanks to inflation.
You should also be aware that once your child has turned 18, the money is legally theirs to spend as they wish. So even if you have grand ideas about saving for a house deposit or university, it may not pan out if your child doesn’t agree.
If your goal is university fees
The cost of university fees has soared in recent years and the cost of living has gone up a similar amount, making it more expensive than ever to study.
The extortionate interest applied to student loan repayments will only add to that. Those on plans 1, 4 or 5 currently pay a 4.3 per cent interest rate, and those on plan 2 or a postgraduate loan plan pay 7.3 per cent.
And the increase in the minimum wage in April will push some graduates into paying back their loans even earlier.
With this in mind, some parents might choose to offset some of that stress by putting money aside to pay for fees and maintenance costs outright.
If you’re considering this, you will need to save around £60,000 to cover tuition and maintenance fees.
Assuming a 5 per cent growth rate compounded over time, you would need to set aside £175 a month if you contribute from birth. This increases to £275 if you start when your child or children are 5, and then up to £505 if they are 10.
However, as is always the case when saving into a Jisa, once your child has turned 18 you cannot decide what to do with that cash.
‘A Jisa can provide a useful pot to cover tuition fees or maintenance costs, but whether the child chooses to use the money for this is not up to the parent,’ says Rachael Griffin, tax and financial planning expert at Quilter.
‘Furthermore, given that student loans only need to be repaid once earnings exceed a certain threshold and that many graduates never fully repay their debt, it might make more sense to use Jisa funds for other long-term needs and instead provide financial support in a more flexible way.’
First home: The Bank of Mum and Dad is helping first-time buyers because of rising prices
If your goal is a house deposit
Younger generations are finding it harder than ever to get on the property ladder, with saving for a deposit one of the biggest barriers.
The Bank of Mum and Dad, and increasingly grandparents, has become one of the biggest lenders, with parents helping fund around half of first-time buyer purchases.
If you’d like to help your child with a deposit, Quilter estimates you’d have to save around £50,000, which if you start at birth would mean setting aside £145 a month assuming 5 per cent annual growth.
This rises to £230 a month if you start when your child is 5, and £425 if they are 10.
‘By the time the child turns 18, the money can be transferred into a Lifetime Isa, allowing them to benefit from the government’s 25 per cent bonus on contributions up to £4,000 per year,’ says Griffin. ‘This can be a powerful way to help them get a head start on homeownership, assuming they actually choose to use the money for that purpose.’
However, be aware that you can only use the Lisa for properties up to the value of £450,000, which has not caught up with average property price growth.
Similarly, there’s also a penalty on withdrawal, meaning that if you take out the money and don’t use it on a property, you will lose the government top-up and some of the original funds too.
That said, the rules and schemes available may change by the time you get to that stage – especially if your child is younger.
If your goal is a wedding
Like everything else, the cost of a wedding has soared and Quilter estimates parents would need to set aside around £20,000.
This looks like a £100 initial investment at birth with £60 monthly contributions thereafter. An initial £100 investment followed by £95 per month from the age of 5, or £100 investment and then £170 monthly contributions from the age of 10, would see you reach this goal.
However, with more people waiting until much later to get married it means that money set aside in a Jisa might end up being used for something else entirely.
Griffin warns that ‘the child might have access to the funds for 12 to 20 years before their wedding and might choose to use it differently regardless.’
Says Griffin: ‘While a Jisa can certainly help fund a wedding, parents should be aware that the parents are purely the caretakers of the Jisa and the money belongs to their child to decide how and when the money is spent.’
‘By the time their child is old enough to access the money, they may decide they would rather put it toward buying a home, starting a business, or investing for the long term.
‘If parents want more control over when and how the money is used, saving into a trust rather than a Jisa may be a more suitable solution.’
If your goal is a pension
If you have a much longer-term view, you could use a Junior self-invested pension (Sipp) to start saving into a pension for your child.
Unlike a Jisa, this means the child won’t be able to access the money until they are 55, or 57 from 2028.
‘The power of compounding means that even a relatively small contribution at a young age can grow into a significant retirement pot over the decades,’ says Griffin.
This avoids the temptation of spending the money on something else, as is possible with a Jisa.
‘Most 18-year olds are unlikely to think about contributing newly found wealth in their Jisa into a pension and lock it away for a considerable period,’ Griffin adds.
What should a Jisa portfolio look like?
Once you’ve decided how much money you’d like to set aside each month, you’ll need to think about where to put the cash.
Jason Hollands, managing director of Bestinvest says investing is a better option than saving the cash because of the returns it will generate.
‘A little invested often can build up a nice pot over time. The maximum you can invest in a Jisa is £9,000 (or £750 a month). Someone in the position to do this for a child from birth, who got an average annualised return of 5 per cent after costs, could build up a whopping £261,901 financial war chest.
‘While most of us won’t be able to fund that amount on contributions, a £50 a month contribution achieving the same average return would still be able to amass £17,460.’
A Jisa should be invested differently to your own portfolio because it is over a much longer period of time.
‘Given the child will not touch the money for up to 18 years, a heavy equities bias makes sense to maximise long-term growth potential,’ says Griffin.
‘As the child approaches 16 or 17, parents may want to begin de-risking if the funds are earmarked for short-term use, such as university. That means shifting some money into cash or lower-risk investments.’
You’ll also want to think carefully about fund costs and how much they might eat into returns.
Hollands says popular options for Bestinvest customers include low-cost global index tracker funds, like the Fidelity Index, whose P class shares have annual costs of 0.12 per cent.
They also opt for F&C Investment Trust, RIT Capital Partners, Personal Assets Trust (for the cautious) and Scottish Mortgage (for the more adventurous).
AJ Bell customers with Jisa portfolios worth £100,000 or more also opt for investment trusts as well as the very popular Fundsmith Equity fund. They also opt for tech stocks, including Tesla, Amazon, Microsoft, Microstrategy and Nvidia.
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