How a Junior ISA could make your child an ISA millionaire

If an ISA can make you seriously rich, just think what a Junior ISA could do for your children with their extra years.

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I’ve already shown how investing in an ISA could net you a million pounds in 20 years, and though relatively few people will be able to invest the maximum £20,000 per year, investing as much as you can during your working life can set you up for a very comfortable retirement.

But how much difference might a Junior ISA make to your children’s fortunes, with the extra 18 years of investing offered? I’ll shortly show how those first 18 years can make a huge difference, but first, how does a Junior ISA work?

The Junior ISA was introduced in 2011 with an annual limit of £3,600, and that’s been lifted to £4,128 currently. Any of your child’s birthday money, pocket money, etc can go into it up to that limit — and, in fact, anyone can add to their pot. Money can’t be taken out before the child reaches 18, at which point the account converts to a normal ISA for the new adult to carry on using for the rest of their life.

But can those early years at that £4,128 limit make that much difference compared to the £20,000 available during adulthood? They sure can, and I’ll show you how:

Adult ISA

The total allowance of £20,000 per year is beyond most people’s reach, so let’s see what happens with half that amount. Investing £10,000 per year would amount to £833 per month, and while that might still not be feasible in the early years, it could easily be surpassed after a few years of career progression.

How much would our subject have by age 50?

I’ll go with a 6% annual return, which I think is achievable, especially considering the number of FTSE 100 stocks with dividends that come close to that. Over a 32-year career and spreading their investments out monthly, our intrepid investor would be able to accumulate a pot of £940,000.

Inflation will take a toll on that, but I assume the annual ISA allowance will keep on rising to compensate for that, and the long-term equivalent of these 2018 figures should be achievable.

What effect might an earlier Junior ISA have?

Junior ISA

Investing the maximum £4,128 per year in a Junior ISA from birth, again at a return of 6%, would morph into a standard ISA worth £132,000 at age 18 — and what a start to adult life that would provide!

But that £132,000 is just the start. If our subject was then able to add the same £10,000 every year, they’d reach 50 with almost £1.8m stashed away.

What’s staggering is the comparison between the two sets of contributions.

That £1.8m would consist of £940,000 generated from 32 years of investing £10,000 per year, and £850,000 from the earlier 18 years of investing just £4,128 per year. So the first 18 years at Junior ISA limits is worth almost as much as the subsequent 32 years in a standard ISA.

That really does hammer home the long-term benefits of investing as early as you can.

Full amount?

What could someone who could invest the full ISA allowance every year through their adult life achieve? Their £20,000 per year for 32 years at 6% would generate £1.88m to add to their Junior ISA accumulation, for a total of £2.73m.

In their case, 32 years of investing £20,000 per year would generate only a little more than twice the earlier 18 years of £4,128 per year. 

Earlier years in the stock market can be worth far more than later years.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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