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The teenagers on track to become ISA millionaires

Craig Rickman reports on the dozens of 18-year-olds inheriting mammoth Junior ISA sums after their parents made some bold investment decisions.

20th August 2024 11:12

by Craig Rickman from interactive investor

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JISA millionaire

Every now and then a personal finance story causes me to double take. After working in the sector for the best part of two decades, this is rare. Many things elicit a raised eyebrow, but not a head scratch.

But an article by Moira O’Neill about Junior individual savings accounts (JISA) published in the Financial Times last Friday contained some truly eye-popping data.

In case you’re yet to stumble across it, a Freedom of Information (FOI) request submitted by wealth manager Brewin Dolphin to HMRC found that the biggest 50 JISAs in the UK average a whopping £761,000.

These are remarkable figures. Thousands of us save long and hard with the goal of becoming an ISA millionaire. Yet some teenagers well on the way there before they’re old enough to qualify for an adult version of the tax wrapper.

To put this into context, a sum of £761,000 that achieved 5% annual returns net of charges, would grow to £1 million in just 5.5 years. This doesn’t include any further contributions.

What’s more, the Brewin FOI found that 370 have JISAs topping £200,000, while those with more than £100,000 is just shy of 2,000.

The annual limits placed on how much you can save into JISAs, and its predecessor, the child trust fund (CTF), make the feat even more impressive. As Moira’s article notes, the maximum total investment was just over £60,000. And rather than the whole lot being invested into the stock market in one hit 18 years ago to get the fullest benefit from compound returns, contributions would’ve had to have been drip fed over time.

It goes without saying that some luck was involved in accruing these monster JISAs. There must have been large allocations to a small number of single company stocks. But it would be unfair to claim fortune wasn’t married with solid investing acumen. The horses that were backed romped home – kudos to that.

The nature of the product means that once a child hits 18 their JISA ceases, with the money automatically transfers into an adult ISA in their name. The child is then free to use the tax-free sum however they please. Never mind a healthy first-home deposit or to leave university debt-free, that’s enough to buy a home outright and cover university costs with plenty to spare.

The case for JISAs…

JISAs are a great way to build a nest egg for your child’s future. So how do they work?

You have two version to choose from for your offspring – stocks and shares or cash – and can save and invest up to £9,000 a year for each child; a generous amount.

The money belongs to the child, and they can only take it out once they reach age 18. Only a parent or legal guardian can open a JISA, but others, such as grandparents, can add to one.

The tax wrapper’s predecessor, the Child Trust Fund (CTF), ran from January 2005 to January 2011, and had a maximum annual investment limit of £1,200.

Although CTFs have been discontinued for new subscribers, you still can keep adding £9,000 (the current LISA limit) to an existing one.

What sums are in the average ii JISA?

We conducted a survey earlier this year and found the average maturity value for a stocks and shares JISA on the interactive investor platform is £20,202.

This may only be a fraction of the top 50 biggest JISAs in the UK, but it’s still a healthy sum to provide a welcome financial boost to help a child hit the ground running in adulthood.

In terms of what investments are preferred, 41% is in funds, 17% in single company shares, with 16% and 15% in investment trusts and exchange-traded funds (ETFs), respectively.

JISA saving and investment options: why you should choose carefully

The latest JISA market figures show plenty of encouragement. Increasing numbers of parents and grandparents are squirrelling money away to give younger generations a valuable financial leg-up.

Provisional data from the 2021-2022 tax year show 1.2 million accounts were taken out, a record amount, with total values soaring past £9 billion.

Number of JISA accounts subscriptions by type

Type2011 to 20122012 to 20132013 to 20142014 to 20152015 to 20162016 to 20172017 to 20182018 to 2019 2019 to 20202020 to 2021 [revised]2021 to 2022 [provisional]
Cash[not available]204310365497569636668706668737
Stocks and Shares[not available]92122145241225271286317287475
Total712964325107387949079541,0239551,212

Total market values in millions

Stocks & Shares Component[not available]1673205159991,3701,8512,2802,1453,4614,980
Cash Component [not available]3907881,1401,7571,9691,3122,5883,2293,6894,021
Total Junior ISA Funds1175571,1081,6552,7563,3393,1634,8685,3747,1509,001

Source: gov.co.uk

So what asset class do parents choose: cash or stocks and shares. And how does each work?

Despite the lower opportunity for growth, when it comes to the number of subscriptions, cash remains the preferred asset class. In the 2021-22 tax year, there were 737,000 cash JISAs taken out, vastly outstripping the 475,000 stock and shares subscriptions.

However, during the same tax year the total value of the stocks and shares version surged past cash for the first time since the product was launched.

In theory there is no right or wrong answer when it comes to choosing between the two JISA types – both cash and stocks and shares have advantages and disadvantages when it comes to risk versus reward.

With cash your child earns interest on their savings which brings the security but limited prospects for growth. While the top savings rates are currently beating inflation, this might not last forever.

With stocks and shares, you invest your child’s money in the market and the inherent ups and downs that come with it. This gives you a much better chance of outpacing inflation over the long term, though there are no guarantees.

Needless to say, parents of children with JISAs north of £100,000 would’ve had to have placed most if not all the money in the stock market. That’s because the interest earned on cash savings was paltry until a couple of years ago.

How do I decide between the two?

A key aspect here is your child’s timeframe. If they have at least five years before they are likely to use the funds, then the stocks and shares version should be your best bet.

This doesn’t necessarily mean that any money from age 13 should be stuck in cash with maturity five years away. As noted above, at age 18, the money switches into an adult version in the child’s name – they don’t have to spend it straightaway.

In fact, in our research, found that almost four in 10 with maturing JISAs invested more than they withdrew within the first month, adding £1,193 on average, net of any withdrawals made.

And this trend continued over the first 12 months. Almost half (46%) topped up their ISA by an average of £7,012– again net of withdrawals.

But as you may expect a similar number accessed their investments with some 42% making withdrawals (net of contributions) averaging £6,728.

Think about the long term

Not every parent will be happy to expose a child’s future to the kind of volatility involved with single company shares – especially if they’re not experienced investors themselves. But a diversified portfolio of stocks and shares, where risk is spread across hundreds of stocks in different regions and sectors, provides a great opportunity to grow your child's JISA wealth over the long term.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

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