The lack of financial education, understanding and responsibility is a widespread problem in the UK. As a nation, we’re certainly less investor-savvy than our US cousins, and also less so than several of our closer European neighbours—ask your average Swede-on the street about their pension portfolio and you’re likely to get a fairly comprehensive answer. It’s unfortunate that I can’t say the same about the average (wo)man on the street in the UK.
Investor education is what Morningstar is all about. So it’s welcome news that the Treasury has today published draft regulations for Junior ISAs that reveal there will be no minimum contributions, an annual maximum of £3,000, a lock-in for the junior in question until age 18, and automatic transfer into an adult ISA at that point. Though these regulations may not fully compensate parents for the loss of government contributions with the end of Child Trust Funds (CTFs), they do offer an opportunity to engage the next generation of savers and investors and to equip them with the knowledge and skills to prepare for their own financial future.
We’re big fans of ISAs at Morningstar. A saving product that enables you to save and invest in a tax-efficient manner certainly gets a thumbs up. And though parents will not be able to transfer existing CTFs into Junior ISAs, or vice versa, a child’s parents, aunts and uncles, and grandparents can all contribute to the account. Fidelity calculates that if a parent invests the full allowance of £3,000 each year they could accumulate savings of almost £108,000 by the time their child reaches 18, based on annual growth of 5%. Certainly not all parents will be able to afford to take full advantage of the annual allowance, but even a fraction of this total projected amount would go a long way to funding important developments in a child’s life such as university fees.
The Treasury is proposing that Junior ISAs be managed on the child’s behalf by someone with parental responsibility, until the child is 16 years of age when they can take over the management of their savings. Withdrawals will not be allowed until the ‘child’ is 18, when the Junior ISA will transfer into an adult ISA, with all the tax-efficient benefits that these vehicles entail. The annual allowance for an adult ISA is currently £10,200 for the last few days of the 2010-11 tax year, rising to £10,680 from April 6.
The fact that children and their parents can not only save cash—something that currently offers little reward, nay, negative returns given that inflation is outrunning interest rates at present—but also invest in stocks and shares is also welcome news. “Young people often have the greatest opportunity to benefit from the long-term performance of stock markets and the Junior ISA will allow them to do so in a tax-efficient way, while also learning about the benefits of saving,” commented Tom Stevenson, Investment Director at Fidelity International.
Ian Sayers, Director General of the Association of Investment Companies (AIC) is also upbeat on the proposals outlined today by the Chancellor and is quick to point out the benefits of investing in investment companies within an ISA structure. “Investment companies offer unique features – the closed ended structure which allows managers to take a long-term view, the independent board to look after shareholder interests, the ability to gear and generally low internal charges,” he said. The AIC calculates that investing £3,000 each year in the average investment company over the last eighteen years would have resulted in a savings pot worth over £121,000 today.
Though young savers might not cheer the prospect of being locked in to age 18 before they can start withdrawing their hard-saved cash, it offers a prime opportunity to engage them in learning about how to save and invest for set goals. We recommend involving your child in the investment process. You don’t have to leave every decision up to them but letting them invest a small portion of their savings in a company that they know and love, Hornby PLC (HRN) being one of many possible, albeit 'old school', examples, can present a tangible way to educate and inform. After all, given the current talk of pension crisis in the UK, it could be their investment prowess that bares the brunt of your retirement costs!
Read more on ISAs and ISA investing in Morningstar's ISA Week Special.
