Martin Lewis has issued a warning for savers as you may be missing on more growth. The piece of advice from the consumer advocate comes as major changes to savings allowances are coming up soon.
On a recent question time episode of his BBC podcast, Mr Lewis was asked by a man if he could open a junior ISA for his nieces and nephew. A key advantage of ISAs is these accounts are entirely tax-free. The financial expert initially told the uncle that unfortunately he would not be able to do open the account himself, as a junior ISA can only be opened by a parent or guardian on behalf of a youngster.
He explained: “You as an uncle can’t do it, it generally has to be the person who has the guardianship or the parentship of the child, to be able to open their ISA, so you will have to do it through them.” However, if you are opening a junior ISA, Mr Lewis had a strong word of warning about what type of junior ISA to go for.
He said: “I tend to almost always get questions about cash junior ISAs. I think junior ISAs are one of those areas where you really, really want to be always be focusing if you possibly can on investing.” Mr Lewis said there is a simple reason why given how the account works.
Better returns
He said: “You’re generally locking money away for 18 years that cannot be accessed. The rule of investing is if you’re locking money away for more than five years – and if you’ve got emergency funds and you haven’t got any high debts, which hopefully children won’t – then you should look at investing over savings because on a balance of probabilities, it will outperform.”
You can put away up to £9,000 a year into junior ISAs on behalf of a child you have parental responsibility for. This can be split as you choose between cash ISAs or stocks and shares ISAs.
A junior ISA is in the child’s name, but the person who opened the account manages it. Once the child turns 16, they can become the registered contact for the account and when they reach 18, the account becomes an adult ISA and they can withdraw the funds.
Savings ‘sweet spot’
Mr Lewis went on to say that funds you put into a junior ISA are in the “sweet spot” as you are putting away money which you don’t need and the amount has a long time to grow. Some key changes are coming up for ISA allowances.
Separate from the junior ISA allowance, adults can currently put away up to £20,000 a year into ISAs. This can be divided as you choose between cash ISAs and stocks and shares accounts.
From April 2027, this is changing so you can only deposit up to £12,000 each tax year into cash ISAs. The remaining £8,000 must be used for investment-based accounts. People aged 65 and over will be spared from the new rules and will retain the current allowance.