The teenagers on track to become ISA millionaires

Every now and then a personal finance story causes me to double take. After working in the sector for the best part of two decades, this is rare. Many things elicit a raised eyebrow, but not a head scratch.

But an article by Moira O’Neill about Junior individual savings accounts (JISA) published in the Financial Times last Friday contained some truly eye-popping data.

• Invest with ii: SIPP Account | Stocks & Shares ISA | What is a Managed ISA?

In case you’re yet to stumble across it, a Freedom of Information (FOI) request submitted by wealth manager Brewin Dolphin to HMRC found that the biggest 50 JISAs in the UK average a whopping £761,000.

These are remarkable figures. Thousands of us save long and hard with the goal of becoming an ISA millionaire. Yet some teenagers well on the way there before they’re old enough to qualify for an adult version of the tax wrapper.

To put this into context, a sum of £761,000 that achieved 5% annual returns net of charges, would grow to £1 million in just 5.5 years. This doesn’t include any further contributions.

What’s more, the Brewin FOI found that 370 have JISAs topping £200,000, while those with more than £100,000 is just shy of 2,000.

• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
• How much to save for retirement if you're starting from scratch

The annual limits placed on how much you can save into JISAs, and its predecessor, the child trust fund (CTF), make the feat even more impressive. As Moira’s article notes, the maximum total investment was just over £60,000. And rather than the whole lot being invested into the stock market in one hit 18 years ago to get the fullest benefit from compound returns, contributions would’ve had to have been drip fed over time.

It goes without saying that some luck was involved in accruing these monster JISAs. There must have been large allocations to a small number of single company stocks. But it would be unfair to claim fortune wasn’t married with solid investing acumen. The horses that were backed romped home – kudos to that.

The nature of the product means that once a child hits 18 their JISA ceases, with the money automatically transfers into an adult ISA in their name. The child is then free to use the tax-free sum however they please. Never mind a healthy first-home deposit or to leave university debt-free, that’s enough to buy a home outright and cover university costs with plenty to spare.

The case for JISAs…

JISAs are a great way to build a nest egg for your child’s future. So how do they work?

You have two version to choose from for your offspring – stocks and shares or cash – and can save and invest up to £9,000 a year for each child; a generous amount.

The money belongs to the child, and they can only take it out once they reach age 18. Only a parent or legal guardian can open a JISA, but others, such as grandparents, can add to one.

The tax wrapper’s predecessor, the Child Trust Fund (CTF), ran from January 2005 to January 2011, and had a maximum annual investment limit of £1,200.

• Junior ISAs: what are the options at age 18?
• My first five years as an ISA investor

Although CTFs have been discontinued for new subscribers, you still can keep adding £9,000 (the current LISA limit) to an existing one.

What sums are in the average ii JISA?

We conducted a survey earlier this year and found the average maturity value for a stocks and shares JISA on the interactive investor platform is £20,202.

This may only be a fraction of the top 50 biggest JISAs in the UK, but it’s still a healthy sum to provide a welcome financial boost to help a child hit the ground running in adulthood.

In terms of what investments are preferred, 41% is in funds, 17% in single company shares, with 16% and 15% in investment trusts and exchange-traded funds (ETFs), respectively.

JISA saving and investment options: why you should choose carefully

The latest JISA market figures show plenty of encouragement. Increasing numbers of parents and grandparents are squirrelling money away to give younger generations a valuable financial leg-up.

Provisional data from the 2021-2022 tax year show 1.2 million accounts were taken out, a record amount, with total values soaring past £9 billion.

Number of JISA accounts subscriptions by type

Total market values in millions

Source: gov.co.uk

So what asset class do parents choose: cash or stocks and shares. And how does each work?

Despite the lower opportunity for growth, when it comes to the number of subscriptions, cash remains the preferred asset class. In the 2021-22 tax year, there were 737,000 cash JISAs taken out, vastly outstripping the 475,000 stock and shares subscriptions.

However, during the same tax year the total value of the stocks and shares version surged past cash for the first time since the product was launched.

In theory there is no right or wrong answer when it comes to choosing between the two JISA types – both cash and stocks and shares have advantages and disadvantages when it comes to risk versus reward.

• The funds pros have personally invested in for Junior ISAs
• When should you talk to your kids about investing?

With cash your child earns interest on their savings which brings the security but limited prospects for growth. While the top savings rates are currently beating inflation, this might not last forever.

With stocks and shares, you invest your child’s money in the market and the inherent ups and downs that come with it. This gives you a much better chance of outpacing inflation over the long term, though there are no guarantees.

Needless to say, parents of children with JISAs north of £100,000 would’ve had to have placed most if not all the money in the stock market. That’s because the interest earned on cash savings was paltry until a couple of years ago.

How do I decide between the two?

A key aspect here is your child’s timeframe. If they have at least five years before they are likely to use the funds, then the stocks and shares version should be your best bet.

This doesn’t necessarily mean that any money from age 13 should be stuck in cash with maturity five years away. As noted above, at age 18, the money switches into an adult version in the child’s name – they don’t have to spend it straightaway.

In fact, in our research, found that almost four in 10 with maturing JISAs invested more than they withdrew within the first month, adding £1,193 on average, net of any withdrawals made.

And this trend continued over the first 12 months. Almost half (46%) topped up their ISA by an average of £7,012– again net of withdrawals.

• My first five years as an ISA investor
• How I plan to invest my ISA allowance in 2024

But as you may expect a similar number accessed their investments with some 42% making withdrawals (net of contributions) averaging £6,728.

Think about the long term

Not every parent will be happy to expose a child’s future to the kind of volatility involved with single company shares – especially if they’re not experienced investors themselves. But a diversified portfolio of stocks and shares, where risk is spread across hundreds of stocks in different regions and sectors, provides a great opportunity to grow your child's JISA wealth over the long term.