The neat trick that can DOUBLE your children's savings... without costing you a penny more
Parents saving into a Junior Isa can potentially double their savings They can do this by 'recycling' into another account when their child turns 18 If they max out allowances it could allow their child to buy a home outright at 27
Parents who are saving into a Junior Isa are well on their way to securing a better future for their children.
But they must not miss out on the chance to double these savings when their child turns 18, with a nifty trick that won't cost them an extra penny.
Making use of another tax-free saving scheme once their child reaches adulthood could boost their savings by £10,000 thanks to free Government bonuses.
Doubling up: Making use of another tax-free saving scheme once your child reaches adulthood could boost their savings by £10,000 thanks to free Government bonuses
'Recycling' the proceeds of a Junior Isa into a Lifetime Isa could be the ticket to giving them enough money to buy a home outright at the age of 27 if parents have maxed out the Junior Isa allowance, or allow for a hefty deposit if they've put in a smaller amount.
A Junior Isa allows parents, relatives and family friends to save or invest up to £9,000 a year tax-free for their children up to the age of 18.
That money then becomes the property of the child when they become an adult, at which point the Junior Isa becomes an ordinary Isa.
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At this point, the money can be moved into a Lifetime Isa (Lisa), an account that is designed to help younger people get onto the property ladder.
The silver lining with the Lisa is that the Government will chip in £1 for every £4 saved in the account, paying a bonus of up to £1,000 on the maximum £4,000 you can save each year.
Any money saved into these accounts can either be used towards a deposit on a first home or be withdrawn from the age of 60 to help fund retirement.
Jason Hollands, of investment group and Isa provider Bestinvest, says that feeding money from a Junior Isa into a Lisa is a 'canny strategy' to achieve one of life's key financial goals.
He says: 'Such a strategy could potentially help them own their own pad in their early to midtwenties, when many young people are typically stuck in the trap of rental accommodation.'
Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: 'Those who opt for a Lisa can super-charge their investments, without any extra effort.'
When a child turns 18, they could start to funnel the maximum allowance of £4,000 a year out of the Junior Isa into a Lisa.
How much is a Junior Isa worth?
Calculations for The Mail on Sunday show that a family that has maxed out a child's Junior Isa with £9,000 saved each year from birth, could grow their nest egg by £169,000 between their child's 18th and 27th birthday without saving a single penny if they use the right combination of Junior Isas and Lisas.
The calculations by Hollands at Bestinvest find that the Junior Isa would be worth £273,000 when the child turned 18 if they saved the maximum each year.
If the child then started to take £4,000 out of this Junior Isa each year and paid it into a Lisa, they would gain a £1,000 a year bonus from the Government.
By following this process, the Lisa would be worth £65,848 and the Junior Isa £376,097 by the time they turn 27 – a combined saving of nearly £442,000. This assumes five per cent investment growth per year, but no extra money added to the nest egg after the child turns 18.
These savings would be enough to buy a home outright in most of the UK, with the average house price currently at £285,000. However, if they choose to live in London, they may find they would only be able to purchase a flat outright.
Few of us can afford to fill up Junior Isas to the max every year. However, even for those whose parents have not been able to max out the Junior Isa allowance, there is still huge benefit in recycling the Junior Isa into a Lisa.
Calculations show that someone whose parents had put away £100 a month since birth into a Junior Isa would have around £35,000 by the time they turned 18.
Recycling £4,000 of these proceeds into a Lifetime Isa each year would almost empty the Junior Isa by the time the recipient turned 28.
However, by doing so the Lifetime Isa would be worth almost £75,000 – more than twice the amount the child received at 18 and more than twice the average first-time buyer deposit of £34,500.
Choose your Isa provider wisely
Once you have decided what type of account to save your money into, it is equally important to choose the vehicle that will get you the best returns.
The calculations above assume the money is being invested in the stock market, and assume average growth rates of five per cent a year, but it is also possible to hold both Lisas or Junior Isas in cash.
At present the highest rate available on a cash Junior Isa is Beverley Building Society's 5 per cent, while Coventry Building Society pays 4.95 per cent and Nottingham Building Society pays 4.85 per cent. The highest paying cash Lifetime Isa is with Moneybox and pays 4.4 per cent, with Tembo paying 4.3 per cent and Paragon paying 3.51 per cent.
However, for longer-term products, many people consider accounts where they can invest rather than leave the money in cash, as historic figures show that investments outperform cash savings over the long term.
Read the small print before jumping in. While Lifetime Isas can be a useful way to turbocharge your child's savings towards a deposit on their first home, there are a few catches to be aware of before taking the plunge.
Any money saved into these accounts can only be used on a property worth up to £450,000. This means that anyone purchasing a property in London, where the average price of a home was £502,690 in February according to the Land Registry, would be limited with a Lisa.
To purchase a property worth more than £450,000, savers would need to take their money out of the Lisa. However, withdrawing money from the account before age 60 for anything other than buying a home within the upper limit incurs a hefty 25 per cent penalty.
