The day-to-day cost of raising a child to age 18 is £154,440, which is 15 per cent higher than in 2011. While this figure from Legal and General is likely to worry new parents, the cost of giving your children a helping hand into adulthood will add to your worries.
The costs of university education, weddings and deposits on a first property are additional goals for many parents. The main vehicle that the government and savings providers promote to parents as a means of investing for these goals is the Junior individual savings account (Jisa). But is this really the best product to use?
With the end of the tax year approaching parents are probably getting their financial affairs in order, including making use of their own individual savings account (Isa) allowances.
Like adult Isas, Jisas have a number of tax benefits: interest and income earned on investments held within the Isa do not incur income tax, and if an investment is sold within the Junior Isa it will not incur capital gains tax. In the current tax year you can put £3,600 into a Jisa, and this will rise to £3,720 for the 2013-14 tax year. This is in contrast to this tax year's adult Isa allowance of £11,280, which a parent may hold in addition to a Jisa for their child.
There are two types of Jisas: cash accounts, and stocks-and-shares accounts that hold a variety of investments including funds and investment trusts. Advisers generally suggest you opt for a stocks-and-shares Jisa if you are investing when your child is young, because over an 18-year time period these will almost certainly outperform cash, especially with current low interest rates.
However, a cash Jisa might be appropriate if the child is a short way off needing access to the fund, for example, if they are 16 or 17 and expecting to use proceeds to fund university.
"But cash Isas often offer temporary bonus rates to lure you in, which then quietly expire, so if you do take out a cash Isa, remember to periodically check the rate you receive to see if you need to switch the account elsewhere," adds Jason Hollands, managing director at wealth manager Bestinvest.
You can shop around for the best cash Jisa rates on comparison sites such as www.moneyfacts.co.uk.
Meanwhile, if you and your child intend to take out the cash on or soon after their 18th birthday, for example, to fund university, then up to five years before you should start de-risking the fund by rotating out of equities, so that a stock market crash shortly before you draw the money doesn't wipe out years of savings. However, if you plan to leave the money in and run the fund as an adult Isa, you could leave it invested in higher-risk, higher-return assets.
Alternatively, a child can have a Jisa of each type - cash and stocks-and-shares - provided the total of the investments put into these each tax year does not exceed the annual limit.
If you opt for a stocks-and-shares Jisa, Jason Witcombe, chartered financial planner at Evolve, suggests a low-cost equities tracker fund, allowing you to get market returns without high fees eating into your returns. He does not feel there is much to be gained with individual shares, certainly in the early stages when the fund is small but still needs diversifying. Buying one FTSE 100 tracker, for example, could be cheaper than buying even just a few shares and will give you much more diversity.
Read more on passive funds for your Isa
and Passive plays for your portfolio
Restrictions
Your child cannot open a Jisa if they already have a Child Trust Fund (CTF) account, and you cannot transfer a CTF into a Jisa. Children born on or after 3 January 2011 or before 31 August 2002 can open one. Most of those born in-between those dates would have been entitled to a Child Trust Fund.
If your child did not qualify for a CTF, for example because the family was living abroad, you can now take out a Jisa if your child is resident in the UK
Only parents or a guardian with parental responsibility can open a Jisa for under 16s, although grandparents and other relatives can contribute. Children aged 16 and 17 can open their own Jisas.
Disadvantages
Many advisers recommend you do not open a Jisa except in certain circumstances, as there are a number of drawbacks.
No withdrawals are permitted from a Jisa until the child reaches 18 so you could not use it, for example, to pay for school fees. At age 18 the Jisa automatically converts into an adult Isa and the child in whose name it is opened has control over the fund and can do what they want with the cash. This may not be what you intended: for example, what you thought would fund university could become, in the words of one adviser: "a motorbike fund."
For these reasons, advisers such as Mr Witcomb suggest that if you are not fully using your own annual Isa allowance you should save for your children within this rather than a Jisa. And if you are likely to turn 55 around the time your child turns 18, you could save extra into your pension and at age 55 take your tax-free lump sum (up to 25 per cent of your pension pot) and give this to your child.
He suggests you only start saving into a junior Isa if you have already used up your own Isa allowance and drawing on your pension is not an option.
Read more on Building a nest egg for your child and Children's funds and Junior Isas
