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.