Junior ISA wealth is booming, with hundreds of lucky children boasting pots worth more than £200,000.
According to HMRC figures for the 2021-22 tax year, 370 youngsters have built fortunes bigger than £200,000, a sharp rise from just 40 in the previous year.
The top 50 child investors are sitting on junior ISAs averaging a massive £761,000 – putting them firmly on track to join millionaires’ row in their 20s.
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The wealth manager RBC Brewin Dolphin, which used a Freedom of Information (FOI) request to obtain the data, said it “may only be a matter of time before HMRC confirms the existence of the UK’s first junior ISA millionaire”.
There are already plenty of adults who are ISA millionaires. An FOI request earlier this year revealed that the 25 largest adult ISAs are worth more than £11.6 million. The UK’s biggest investment platform, Hargreaves Lansdown, says 1,160 of its customers are ISA millionaires.
It’s harder for kids to accumulate large amounts in junior ISAs, as the maximum time frame to invest is from birth to age 17. In comparison, adults have their entire life from age 18 to save and invest in an ISA.
Plus, the junior ISA allowance is much smaller, at £9,000, versus the adult ISA allowance of £20,000.
In terms of junior ISAs that are worth more than £100,000, there are 1,910 kids with pots of that size. This is more than triple the number recorded a year previously, when there were just 540 young investors with an account running into six figures.
Rob Burgeman, investment manager at RBC Brewin Dolphin, comments: “Junior ISA wealth is booming as more and more families take steps to help the next generation navigate a world of costly tuition fees and ballooning house prices.
“The annual £9,000 JISA allowance is less than half of its adult counterpart, and for that reason very few people ever imagined that there might be school children sitting on pots of £750,000 or more.”
How to build a giant junior ISA
While the junior ISA only launched in 2011, parents were also allowed to transfer in any savings from its predecessor the child trust fund (CTF).
The biggest junior ISAs revealed in the HMRC figures are assumed to incorporate both CTF and junior ISA contributions made over a 17-year period beginning when the CTF was launched in 2005.
According to RBC Brewin Dolphin, building a war-chest of £761,100 would have required “extraordinary, annualised returns of just under 32% to turn total contributions of £63,436 into £761,100 over this time frame”.
Total gains would have amounted to a staggering £697,667.
“This kind of turbo-charged growth simply can’t be generated through patient cash saving,” says Burgeman.
“The lesson to be learned is that the stocks and shares junior ISA has rewarded investors with far better returns over the long term than the cash junior ISA. In fact, over the same time period, the cash junior ISA could have grown to approximately £66,000.”
Investing nearly always generates bigger returns over the long term compared to saving money in a bank account. So, if you're saving into a junior ISA for a baby or toddler, consider using a stocks and shares account to accelerate the growth.
The theory is that any bumps in the stock market should be smoothed out by the child celebrates their 18th birthday.
However, if you are opening a junior ISA for an older child, say, aged 13 or 14, there are only a few years to go until they reach 18, in which case a cash junior ISA could be more suitable.
What about a more modest junior ISA?
The figures also revealed that 16,420 children have a junior ISA worth £50,000 or more. A year earlier, the number was just 8,130.
A pot of £50,000 is much more manageable to build. For example, a family could contribute about £150 a month from birth, and with a 5% annual return after fees, the account could be worth £50,000 by the child’s 18th birthday.
Increase the contribution to £300 a month, and the junior ISA holder will be looking at a windfall of around £100,000.
“Not every family will have the means to amass £500,000 by the time their children head off to university,” notes Burgeman, “but a more modest pot of £50-£100,000 will certainly be within the reach of many. Start early and you are more likely to reap the rewards.”
A £50,000 pot could potentially help an undergraduate complete their degree without taking on debt, or go towards a first-time buyer’s deposit.
Smaller amounts could be used for a gap year backpacking, or to buy a first car. Teenagers can also choose to roll their junior ISA into an adult ISA and carry on saving or investing.
How do junior ISAs work?
Junior ISAs are tax-free savings accounts available to children under the age of 18. There’s a cash version, and a stock and shares version.
While a parent or guardian has to open the account, anyone (such as grandparents, aunts and uncles, and friends) can contribute to it. A maximum of £9,000 can be paid in each tax year.
The savings cannot be touched until the child turns 18, at which point they can spend or save the cash as they please. The money can either be withdrawn by the holder or transferred into an adult ISA.
The vast majority of junior ISAs are worth less than £10,000: according to HMRC’s figures, around 1.6 million children are sitting on pots less than £10,000.
How else can I save for my child?
Some parents worry that their child may spend the money recklessly at age 18 rather than using it in a more responsible way.
For those parents who want more of a say in how the money is spent, another tax-efficient method of passing wealth to the next generation is the use of a trust.
A trust allows donors to give away assets indirectly. Typically, a trust is held and managed by a third party known as a trustee.
According to RBC Brewin Dolphin, grandparents will often set aside money for grandchildren with the parents as trustees. Money is typically released when the grandchildren are mature enough to make prudent financial decisions. Though this is at the discretion of the trustees and there is no obligation to wait until the child turns 18 or 21.
Burgeman comments: “There are many types of trust but a discretionary trust is perhaps the perfect vehicle for families to pass wealth on in a tax-efficient manner at a time of their choosing.
“Unlike the junior ISA, children and grandchildren don’t have an absolute entitlement to the funds even when they reach the age of 18.”
Another option for parents and grandparents looking to invest in a child’s future is the use of pensions.
Parents or grandparents can contribute to a junior pension, usually up to £2,880 per tax year. Contributions benefit from 20% income tax relief, which boosts that £2,880 to £3,600.
We have more tips and ideas in How to make your child a tax-free millionaire by age 37.
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