Parents who are saving into a Junior Isa are on their way to securing a better future for their children. But they shouldn’t miss the opportunity to double those savings when their child turns 18, with a clever trick that won’t cost them a single extra cent.
Making use of another tax-free savings scheme once your child reaches adulthood could boost their savings by £10,000 thanks to free bonuses from the Government.
‘Recycling’ the earnings from a Junior Isa into a Lifetime Isa could be the ticket to giving them enough money to buy a house outright at the age of 27 if parents have maximized the Junior Isa allowance, or allowing for a sizeable deposit if they have put a smaller amount.
A Junior Isa allows parents, family and friends of the Step up family: Lisa and Jamie with twins Eleanor and JJ to save or invest up to £9,000 a year tax-free for their children up to age 18. That money then becomes the property of the child when he or she becomes an adult, at which point the Junior Isa becomes an ordinary Isa.
At this point, the money can be transferred to a Lifetime Isa (Lisa), an account designed to help younger people get on the property ladder. The plus side for Lisa is that the Government will match £1 for every £4 saved in the account, paying a bonus of up to £1,000 on the maximum £4,000 you can save each year.
Double down: Making use of another tax-free savings scheme once your child reaches adulthood could boost your savings by £10,000 thanks to free government bonuses.
Any money saved in these accounts can be used for a deposit on a first home or withdrawn from age 60 to help fund retirement.
Jason Hollands, of investment group and Isa provider Bestinvest, says putting money from a Junior Isa into a Lisa is a “shrewd strategy” to achieve one of life’s key financial goals.
He says: “This strategy could potentially help them to own their own home in their mid-20s, when many young people often get caught in the trap of rented accommodation.”
Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: “Those who opt for Lisa can boost their investments without any extra effort.”
When a child turns 18, they could start channeling the maximum £4,000-a-year allowance from the Junior Isa into the Lisa.
Calculations from The Mail on Sunday show that a family who have maxed out a child’s Junior Isa with £9,000 saved each year since birth, could increase their savings by £169,000 between their child’s 18th and 27th birthdays without saving a single penny if they use the correct combination of Junior Isas and Lisas.
Calculations by Hollands at Bestinvest find that the Junior Isa would be worth £273,000 by the time the child turned 18 if they saved the maximum each year. If the child started taking £4,000 out of this Junior Isa each year and paid it to a Lisa, he would get a bonus of £1,000 a year from the Government.
Following this process, Lisa would be worth £65,848 and Junior Isa £376,097 by the time they turn 27, a combined saving of almost £442,000. This assumes investment growth of five percent per year, but no additional money is added to savings after the child turns 18.
These savings would be enough to buy a house outright in most parts of the UK, the average price of which is currently £285,000. However, if they choose to live in London, they may only be able to buy a flat outright.
Few of us can afford to max out Junior Isas each year. However, even for those whose parents have not been able to maximize their Junior Isa allowance, there is still a huge benefit to recycling Junior Isa into Lisa.
Calculations show that someone whose parents had saved £100 a month since birth into a Junior Isa would have around £35,000 by the time they turned 18.
Recycling £4,000 of this income into a Lifetime Isa each year would almost empty the Junior Isa by the time the recipient turns 28. However, doing so would make the Lifetime Isa worth almost £75,000, more than double the amount the child received at 18 and more than double the average first-time buyer deposit of £34,500.
Choose your Isa provider wisely
Once you’ve decided what type of account to keep your money in, it’s equally important to choose the vehicle that will give you the best returns.
The calculations above assume the money is invested in the stock market and assume average growth rates of five per cent a year, but it is also possible to hold both Lisas and Junior Isas in cash.
Currently, the highest rate available for a Junior Cash Isa is 5 per cent from Beverly Building Society, while Coventry Building Society pays 4.95 per cent and Nottingham Building Society pays 4.85 per cent. The highest cash-paying Lifetime Isa is with Moneybox and pays 4.4 per cent, Tembo pays 4.3 per cent and Paragon pays 3.51 per cent.
However, for longer-term products, many people consider accounts they can invest in rather than leaving the money in cash, as historical figures show that investments outperform cash savings in the long term.
Read the fine print before you take the plunge. While Lifetime Isas can be a useful way to boost your child’s savings for a deposit on their first home, there are some drawbacks you should be aware of before taking the plunge.
The money saved in these accounts can only be used on a property worth up to £450,000. This means that anyone buying a property in London, where the average house price was £502,690 in February according to the Register of Property, would be limited to one Lisa.
To buy a property worth more than £450,000, savers would have to take their money out of the Lisa. However, withdrawing money from the account before age 60 for anything other than purchasing a home within the upper limit carries a hefty 25 percent penalty.
I hope to give my children an advantage
For Lisa Marie Godfrey, the Junior Isas she has created for her 11-year-old twins, JJ and Eleanor, are an opportunity to give her children a better start in life.
The entrepreneur, who runs a non-alcoholic drinks app called Non-Toxicated, started saving on bills during lockdown and puts £60 a month into each Junior Isa.
The money is invested in the stock market to give it the best opportunity to grow, he says.
One step forward: Lisa and Jamie with twins Eleanor and JJ
Lisa, who lives in South Yorkshire with her husband Jamie and the twins, says: “We wanted to have something ready to give them a little boost when they finish school.”
Although she is still unsure what the money will be used for, a house deposit is one of her priorities and she says that if her children decide to use the savings in this way, she will look into opening a Lifetime Isa for them.
She says: “It’s very difficult for young people to get up the property ladder these days, so the Government bonus will be a big help.” It seems like a very good use of money.’
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