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Junior ISAs: The debt-free way to help fund your child’s university education

Section: Finances
Saving with a Junior ISA

How a Junior ISA could help pay for your child’s degree

It’s a life decision that’s unfortunately becoming ever more expensive – but in 18 years, there’s every chance that your little one (by then not so little) will be packing their bags and heading off to university. But there’s just one small snag in that scenario: going to university is expensive. Very expensive.

A number of top universities, including the London School of Economics and King’s College, recently announced that their fees for 2017/18 will be raised to £9,250 per year – £27,750 in total for a three-year degree. That’s on top of accommodation, books and general living expenses. Normally, children from less well-off families would receive a grant, but these are due to be scrapped and replaced with further loans. In 2016/17, students will be able to take out up to £8,200 in maintenance loans, making £24,600 for three years. Even if the maintenance figures don’t increase for 2017/18, the total debt for an average undergraduate could reach an astonishing £52,350.

It doesn’t seem like it’s going to get cheaper any time soon, either. Professor Nick Petford, Vice-Chancellor of Northampton University, has warned that in the future, universities will be able to charge up to £20,000 in tuition fees.

So, how can parents help reduce the amount of debt their children will be likely to face? One option is a Junior ISA.

What’s a Junior ISA account and how does it work?

It’s quite simple: a Junior ISA is a savings account created to invest money for a child’s future where no tax is paid on the interest or growth of the plan.

There are two main types of ISAs: cash ISAs and stocks and shares ISAs. A cash ISA means that the bank or society pays interest on the lump sum in the account. A stocks and shares ISA, however, means that the lump sum is actually invested into shares or funds; this can have higher long-term returns than a cash ISA as there’s a potential for high growth in the investments’ value, but these returns are not guaranteed. 

As of the 2016-2017 tax year, up to £4,080 can be deposited in a Junior ISA every 12 months. Anyone – parents, grandparents, far-flung relatives and family friends – can put money in, at any time.

Only parents can open the account, but the money will always be the child’s. They won’t, however, have access to it until their 18th birthday, at which point they can take the money or usually will also be able to convert it into a standard ISA. As we said above, no tax at all is paid on the interest or growth, meaning it’s a great way to build a little nest egg for your kid.

How much should I save?

You’ve got up to 18 years to make deposits into your child’s Junior ISA, so paying in a little bit every so often will, eventually, really add up (especially if Mum, Dad and the grandparents are all contributing). Even if your deposits are small, it’s worth jointly aiming for the magical figure of £4,080 – if you don’t use this annual allowance, you can’t carry it over to the next year.

Research shows parents put aside an average of £42.45 a month per child. Over 18 years, that makes £9,936. With an ISA growing at 2.5% a year, the same sum would reach £11,564.97 in 18 years.

If you met the maximum allowance of £4,080 by putting in £340 every month, the ISA’s value growing at the same rate could reach as much as £92,628.77 in 18 years – potentially enough to keep your child debt-free throughout their degree.

How can I start saving?

It’s easier than you might think to start putting some money aside – all it needs are some small changes. Here are five steps to start building that nest egg:

  1. Switch to tap water: Surveys show that most people cannot tell the difference in taste between tap and bottled water. If you drink the recommended 2l of water a day from branded bottled water at a cost of 84p per litre, you’re spending around £25.55 a month. If your tap water costs 0.1p for a litre, you’d only pay 3.1p a month. Annual saving: £269.40
  2. Go for homemade coffee: Particularly the shop-bought variety. For every cup you save, put the amount into your child’s Junior ISA. If you normally spend £2.50 every weekday, that’s around £55 a month. Annual saving: £650
  3. Make a shopping list: Plan your meals in advance and stick to it to avoid buying things you won’t need. The average family with children throws out almost £60-worth of food per month. i
  4. Check your energy spending: A lot of us spend more than needed on energy. If you haven’t changed provider recently, you have a high chance of being able to save up to £369. Equally, making sure you’re using energy-efficient appliances, such as washing machines, can save you in the long run – as much as £247 annually. Insulation – which can be free – can save up to £300. Annual saving: £916
  5. Walk or cycle to work: It’s good for you and good for your bank balance – the average UK employee spends £148 a month getting to and from work. Annual saving: £1776            

If you carried out all these steps and managed to get the maximum savings, you could have gained up to £4,311.40 – enough to meet the Junior ISA yearly allowance of £4,080. In 18 years in an ISA growing at 2.5% per year, that £4,080 (without any further money paid in over the years) could turn itself into £6,395.72.

How do I choose a Junior ISA?

From banks and building societies to friendly societies like Shepherds Friendly, Junior ISA accounts are available from a range of financial institutions. The best offer not only attractive interest rates, but added features like annual bonuses. It’s worth, then, shopping around to find which suits you best. It’s also important to remember that when you take out an investment product like an ISA, your capital is at risk and you may get back less than you’ve put in.

While features vary from provider to provider, the Junior ISA’s premise remains the same across the board – the account, for example, will always be in the child’s name, but it will be the parents, referred to as ‘registered contacts’, who’ll be responsible for paying in and raising issues with the bank or society.

The registered contact is free to choose a different Junior ISA if, later on, they find a better deal elsewhere. While they’ll never have access to the money the account contains, parents are also able to switch from a Junior cash ISA to a stocks and shares one. It’s even possible to open one of each, provided the £4,080 annual deposits limit is split between them. The only way for this limit to be increased is when the child reaches 16, when they’re free to open a cash ISA. This would see their tax-free savings allowance rise to £15,240 – so it’s a good idea to teach them to be savvy savers from a young age.

What will my child learn?

Talking of teaching children to save, a Junior ISA’s an excellent way to help your child understand about saving money. Children get an average of £6.65 of pocket money a week; you could encourage them to save half of that and put it into their ISA, so that they can learn about thinking long-term about their money. This has the added bonus of understanding how to budget and be careful with allocating money for spending versus putting aside – meaning they’ll be in a much better position to manage their finances when they go off to university.

There’s no denying a Junior ISA can be a perfect 18th birthday present – you’ll have taught your child about saving and given them the means to live well at university and concentrate on their studies, all without making such a large one-off dent in your bank account.