The kids are alright

If you’re getting organised for the end of the tax year on 5 April, don’t overlook Junior ISAs. Most savers and investors are very familiar with conventional individual savings accounts (ISAs), through which you can make up to £20,000 of tax-free investments each year; but they know less about Junior ISAs, which offer many of the same benefits and enable you to save tax-efficiently for children.

Junior ISAs can only be opened by parents on behalf of their kids, but once the account is up and running, anyone can contribute to it – including grandparents, other relatives and friends. The annual allowance is less generous than for adult ISAs – the maximum total amount is £9,000 per child – but still offers the opportunity to build up generous pots of savings for children over time.

All the more so given that inside a Junior ISA, you can invest in exactly the same range of assets as in the grown-up versions – including cash, shares, bonds and most collective funds. All income and gains are tax-free.

Once the child turns 18, they take control of the Junior ISA and can make withdrawals if they want or continue to save – at this stage the accounts effectively convert into full ISAs and children can start investing up to £20,000 a year.

If Junior ISAs sound like a good idea, where should you put your money? Well, analysis by Interactive Investor, focused on its wealthier clients, says most contributors to Junior ISAs prefer collective funds run by a professional manager – either open-ended vehicles or investment companies. And three investment companies – F&C Investment Trust, Alliance Trust and Scottish Mortgage – feature in the top ten individual holdings most commonly found in Junior ISAs on the Interactive Investor platform.

The popularity of investment companies amongst Junior ISA investors mirrors the position with adult accounts. Interactive Investor has previously revealed that investment companies are disproportionately popular holdings with its most successful investors; those who have built up accounts worth £1m or more on the platform hold an average of 43% of their money in investment companies.

In fact, investment companies have long been popular with parents saving on behalf of their children. At one stage, many offered specialist savings plans for children; these have fallen away in recent times, as investors have begun dealing through online platforms, but the funds are as popular as ever.

There are good reasons for this. Performance comparisons repeatedly show that investment companies have outperformed other types of fund, even when investing in similar kinds of asset, over longer-term periods. And if you’re investing for a child with the intention of providing a nest egg for higher education – or even a first property purchase, say – you can afford to take a long-term view.

Many parents have also been attracted to investment companies’ competitive charges, the potential to diversify into new asset classes such as infrastructure and private equity, and a governance model that holds managers accountable.

With tax rules on investment dividends and capital gains set to tighten from 6 April, it makes sense to organise your finances with tax efficiency in mind. Just remember that children are also liable for tax – make sure they’re properly protected from the taxman too.