Because people are generally good, they want to save for their children’s future. And because we believe Wealthsimple is also generally good, we think it’s a pretty important thing to do. University graduates in the UK today leave university with debts averaging £30,000 — and many leave burdened with much more. In fact you may, while reading this article and wondering how to save for your child, still be paying down your own student loans.
If only saving for your child's education were easier. We hear it from our clients all the time. And we see it in the fees people are paying — fees that make it harder to reach that goal. That’s why we believed the whole process was in serious need of a Wealthsimple Makeover (not the name of our show on Sky; at least not yet!).
Today, we're proud to announce that we’re launching the Wealthsimple Junior ISA (JISA). It will make saving for your kids' future more efficient than ever before. To help you understand how it all works, we composed this handy FAQ.
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Okay, I know what an ISA is. What's a JISA? (Is it an ISA with a silent J?)
A Junior ISA (JISA) is an account earmarked for saving and investing money to pave the way for your child's future. (And yes, you pronounce the J!) A parent or guardian opens the account on behalf of a child. And once opened, anyone can make deposits to a child’s JISA — a grandparent, a godparent, an extremely benevolent second uncle twice removed. Once in the account, the money can be invested and, hopefully, put to work earning healthy returns.
Here’s one of the most important advantages a JISA has over standard taxable accounts: the money your account earns is free of income tax and capital gains tax. As of 2017, you can contribute up to £4,128 per year in a JISA. And it's a one-way street — once the money is in the account, it can't be withdrawn until the child is 18.
I've heard that a stocks-and-shares JISA is better. Is that true?
There are two types of JISA: cash accounts, and stocks-and-shares accounts. The cash JISAs work a little like savings accounts. And the better ones can offer as much as a 3% annual interest rate. That’s a lot better than just about any regular ISA or savings account.
But even 3% annual return may not be enough to put you on the fast track to debt-free education. Why? First of all there's inflation — right now the inflation rate is about 3%, which could cancel the gains you’d make in your cash JISA.
We often recommend the stocks and shares JISA option for our clients because there is the potential for even greater returns — especially given that the earnings aren't taxed in a JISA. When you open a Wealthsimple JISA, we create a diversified, low-fee portfolio that invests in passive funds that track the global economy. No one can guarantee returns, especially in the short term. But historically this has by far been the most effective way to make your investments grow. And since you can't withdraw until the child is 18, you'd be wise to think like a long-term investor. It's true that when you invest you risk going through market downturns. But, in the long term, the stock market generally trends upward.
If you start early, set up automatic deposits, and stay the course, over time you’ll have a pretty tidy sum for your little genius’s university fund.
I’ve looked at the historical returns from the funds you invest in. They’re pretty impressive. But what about fees? I’ve heard fees can be a hidden drag on returns.
We didn’t mention our low fees yet? Because our fees are low. Very, very low. We charge a transparent 0.7% annual fee — which steps down to 0.5% for clients with £100,000 or more invested with us. UK investment firms, on the other hand, charge an average of 2.56%.
Maybe that difference doesn't seem like a lot (though we hope it does, since it’s more than three times as much!). But it could mean many, many thousands of pounds over the lifetime of your investments thanks to the magic of compound interest.
But what happens if it all gets timed wrong and the market crashes just as my kid gets her A-level results?
There's always risk when you invest. And a stock market crash is one of them. But how you invest is critically important when it comes to keeping the nest egg for your child safe.
One way we address that is by changing the risk level of your investments as you get closer to the time you need to pay those university bills. Wealthsimple helps do this by learning about your risk level and adjusting the asset allocation — you can learn more about that here. In the early years of your child's life, for instance, your risk profile will prescribe an investment mix that's, say, 80% equities (aka stocks) and 20% bonds. That's why Wealthsimple would build you a more “aggressive” portfolio; stocks are inherently riskier in the short-term because their prices fluctuate more frequently than bonds but are also likely to end up giving higher returns over the long-term. (As always, there's no way to guarantee returns.) But then, in your child’s teenage years, your risk level changes. And we'd help you change to make your investments more conservative as uni approaches — perhaps the portfolio we build would have a mix of 40% equities and 60% bonds, for instance. As your account grows, we'll always have Portfolio Managers on hand to help you understand your present financial situation and adjust the asset allocation of your portfolio if necessary.
How do you set your risk level? It happens when you answer just a few questions in our app or online during the setup process — or you can do it over the phone with a human, should you prefer the old-fashioned method. And you can always rebalance your child’s investment as time goes on, free of charge.
OK. I have one more question. Is the JISA mine, or my child's? As much as I love my child, I'm not sure I think they should be in charge of all that money when they turn 18.
We think, first of all, the fact that they have their own JISA is a great excuse to educate your children about investing. It's empowering, and they don't teach it to you at uni.
But yes, at 18, they'll be free to spend it wherever they please — there are no stipulations about how a JISA is used. If that scares you, and you’d prefer to keep control of that money and the way it’s spent, there’s another option. Set up an adult ISA (or supplement your own existing adult ISA) and invest in the same passive index funds with all the same benefits. The upside here is that the yearly limits of an ISA are greater — £20,000 as of this year. On the other hand, if you're maxing out your ISA, a JISA allows you to save even more.
But in a way the best thing about a JISA is that it's really for your child. You can't be tempted to pull money out and use it for yourself. And of course that it can get bigger faster because grandparents, godparents, and those second uncles twice-removed can chip in.
And remember, at Wealthsimple we’ll waive all fees on the first £5,000 you invest for a whole year. So what are you waiting for? She may be in nappies now, but she’ll be in halls soon enough…
Wealthsimple makes smart investing simple and affordable.
All investing should be considered long-term. While stock markets have typically trended upwards over the long term, your investments can go up and down, and you may get back less than you invest.
Your tax treatment is dependent on your individual circumstances and can change over time. Connect with a tax adviser or an accountant if you have any questions relating to your personal tax treatment.