Emma Wall: Hello and welcome to the Morningstar series, Ask the Expert. I'm Emma Wall and here with me today is Darius McDermott of Chelsea Financial Services.
Hello, Darius.
Darius McDermott: Hello Emma.
Wall: So we are here today to talk about Junior ISAs or New Junior ISAs, New JISAs, because of course it's not just adult savers and investors that are going to benefit from this extra bump in tax free investments and savings come July 1. Is it, Junior ISAs are going to benefit as well?
McDermott: Junior ISAs are also getting a raise in their allowance to £4,000 per annum. Now, again it's a powerful savings tool for parents and grandparents to contribute to long-term savings for their children, whether it be to give them a start in the property ladder or to help fund university education, which is extremely expensive, these are really good tools for long-term savings for children now.
Wall: Should we just recap on the rules around JISAs, because of course with adult ISAs you can put money and take money out as you wish. If you take that money out, of course you lose the tax efficient status on it for that tax year. But Junior ISAs, you can put money in for 18 years, but not until they mature can you take withdrawals, is that correct?
McDermott: Yeah, that's correct, absolutely. You can't actually get access to the money as a child or as a becoming adult until you are 18. You can transfer them into your own name at 16, so it is a good way of long-term savings. I think with long-term savings, you can afford to actually use investments and maybe some riskier investments to try and boost that total return over time.
Wall: Let's talk then about the sort of things, because you are forced into taking such a long-term horizon, that people maybe should be considering the sectors, the regions for JISAs?
McDermott: Yeah, I mean I think it's nice first opportunity, something like Rathbone Global Opportunities, which is a global fund which gives you a nice spread of geographies. It does have a sort of a medium and small cap bias and a growth bias, and I think over long-term that is a good sort of starting block.
I think people can afford to take a bit more risk. So, sort of the growing and emerging parts of the world, emerging markets, something like JPMorgan Emerging Market Income is a good way into emerging market or something like First State Asia Pacific Leaders, I think would be sort of, certainly maybe not for all of an investment, but if you are utilizing a full £4,000 per year, you would probably want to build up a portfolio of five, 10 funds over time and a global would be a nice start. Then, I think diversifying into some of the emerging and growing parts of the world would be appropriate for that longer-term type of investment.
Wall: I noticed there a couple of funds that you mentioned had income in the title. That was very important over a long-term, isn't it? Because you can accumulate those units and compound interest makes a huge difference?
McDermott: Well indeed, just because a fund pays an income, it doesn't mean you actually have to physically take it. As we already said with Junior ISAs, you can't. So, you would reinvest that income and what it does, it physically buys more units in the same fund or increases the unit price by the same amount of that distribution.
Also, income strategies have proved very, very important and powerful over the long-term and in emerging markets as well. Because it tends to lead you to more mature companies, that have better corporate governance in emerging markets. JPMorgan have got very well resourced team and experienced fund manager leading that proposition, so I think that's a nice fund to pick. Whilst appreciating that emerging market investing generally does carry more risk than, say, investing in the UK or Europe.
Wall: One last thing to mention, when the child becomes 18, when that Junior ISA matures, it doesn't lose its tax free status, does it?
McDermott: No. I mean, there is nothing to say that it shouldn't be the start of an even longer savings journey for that child. But they can access the money at 18, it doesn't mean they have to take it all out. It would then really convert into adult ISA at 18 and the tax benefits would stay the same, so it is a long-term savings vehicle.
If you think of university education, if you've built up a good sum and they then need to draw down, whatever it might be, £10,000 or £20,000 a year out of a big pot, you could still have the rest of it growing and staying in the tax free status, so really good for sort of long-term planning for things like university education.
Wall: Darius, thank you very much.
McDermott: My pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
