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A different kind of birthday or Christmas present

The other day whilst having a jolly pint with a friend in the pub with our conversation was soon steered away from the football as we were both pondering options what present to give to a child that would not end up in landfill. While we had some pretty good ideas on wooden toys that the child can paint itself we were most drawn to the idea of gifting money in a special way. Who can blame us for this as you hear nothing else on the news other than the cost of living crises and how the next generation is doomed not to effort a home or anything else as the country's economic outlook goes down the pan! Not even a pint could not brighten our mood! However, we soon jollied up again once we discussed investing on behalf of our loved once so they will have something when they are old and there is even a savvy way do this by means of a Junior stock ISA.

WHAT is an ISA?

An ISA or Individual Savings Account is an account where you put money in that is both entirely free of income and capital gains tax. This is why an ISA account is sometimes referred to as a wrapper! Think of it as box where you can put our investments to gain various goodies!

There are various types of ISAs, giving you different types of benefits depending on your preferences, the most common are:

  • Cash ISA

A tax free bank account where you can park your emergency funds. When interest rates are rising a cash ISA is really worth a considering if not for the nasty inflation which when greater than our bank interest literally eats up any return you will make in the account

  • Stocks & shares ISA

This is the praline box of my choice as you can invest into shares, bonds and some other asset classes and I love my stocks and shares. You can buy and sell assets such as stocks within this box without any tax implications from tax capital gains tax. You also don't pay any tax on any income resulting from your share investments such as dividend income. However, stocks and shares come with risk which you need to carefully considering before deciding to to put your money into this box.

  • Junior ISA

A junior ISA can basically come in two different ways either as Cash Junior ISA or as a Stocks and shares junior ISA. As a parent you can open a Junior ISA for your child and manage it on behalf of your loved one. Once your child turns 16 he or she can apply to manage the ISA but is not allowed to withdraw money until the age of 18 when the Junior ISA morphs into a "normal/standard" ISA. A little bit more on the Junior ISA further down!

  • Lifetime ISA

A lifetime ISA a box designed to go the distance as it comes with a special perk from the government! The government will pump up the amount you put in by another 25% each tax year. So lets assume you put in 1000GBP in 2023, HMRC will give you an extra 250GBP on top! The maximum you can contribute that HMRC is willing to beef up is 4000GBP. So if you decide to put in 5000GBP in 2023, HMRC will only give you 1000GBP., which is 25% of 4000GBP (the maximum cap).

  • Innovative Finance ISA

This is quite a niche ISA that allows peer to peer lending. It is neither a cash ISA nor a stocks and shares ISA. It is a sort of lending instrument without the middle man being the bank. It matches up investors, who are willing to lend money , with borrowers, who could be individual people, businesses, or even property developers. I personally think it is quite risky because these platforms are not protected by the Financial Services Compensation Scheme should they go bust. This is obviously also a big plus for standard ISAs.

Now I have explained the basic concept of ISAs to you I would like to go back to the conversation I had with my friend in the pub which was about presents that will make our children very happy in the future.

I was really getting into the idea of Junior stocks and shares ISAs once we had explored all the pros and cons of wooden toys. You probably think that stocks and shares are too much of hot potatoes especially when it comes to caring for the future of your children. But while I agree that there are risks involved I find the idea of long-term investing/saving with stocks very enticing because a long term view on this subject is already one prudent risk management measure you can take. Nothing explains this better than the picture below:

Source: TAGStone Capital, Inc.

The picture above shows the performance of the MSCI world stock market index, which comprises the biggest companies of the world over time.

As you can see if you had adopted a longer time frame you would have weathered many crisis and still ended up on top. Ultimately this index shows the world's progress because of the fact that it features the biggest and most successful companies such as Microsoft, Apple, Siemens, etc... And as long as you believe in the world's progress and human ingenuity to make it a better place than this graph will over the long term point up! It may feature different companies reflecting the times we live in but ultimately it will feature companies that will keep on inventing great things!

And this fact makes it attractive for a Junior stocks and shares ISA. The idea is that I want my child patriciate in the world's progress in which it will grow up and when it is old enough use the benefits from it to either pay for its studies or pay for a deposit on a house. And lets face it inflation is never really going away and banks probably not able or willing to over bank interest above inflation so why not take a shot and be positive about the world's progress, it least that is the idea. Now the technicalities:

To open a Junior ISA, your child has to be under 18 and living in the UK. Nationality does not matter as long as it is a UK resident. You can only open an ISA on their behalf if you’re their parent or legal guardian. Anyone can pay into a Junior stocks and share ISA up to the amount of 9000GBP per year as it currently stands for the tax year 2022/23. As mentioned before there’s no Income Tax or Capital Gains Tax to pay on investment gains or interest (should you decide to purchase a bond, which pays out interest). There are quite a few providers of Junior stock and shares ISAs to choose from and it is quite easy to switch between them here are a number of them:

There are many more but I wanted to name some familiar brands.

One last really important point especially when you invest over such a long period of time is whether you are protected if your ISA provider (the ones listed above) goes bust. Good news, the government has your back as they cover any investments up to a maximum of £85,000 via the Financial Services Compensation Scheme. So, in the very unlikely scenario your ISA provider goes bust, you would get your money back.

Even while nursing a hangover this sounds brilliant!


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