Were coming up to ISA time, and from 6 April well each have a whole new allowance to use, with the proceeds protected from tax and, of course, we still have whats left of our existing 2015/16 allowance to use by by 5 April too.
Ive previously explained how investing in shares is likely to get you far better rewards than cash, and a lifetime of seeing share values rise and not paying a penny in capital gains tax (and not paying any higher-rate tax on dividends) is a very attractive prospect.
Its not just for adults either, as any child under the age of 18 has an annual Junior ISA allowance too, currently standing at 4,080 for the 2015/16 tax year. Now, you might wonder what the point is, when most children arent earning enough to pay any tax anyway but theres a very good reason.
You see, once you reach the end of each tax year, any ISA savings from that year retain their tax-protected status permanently so even if your children arent saving any tax in their earlier ISA years, if they let it accumulate for the long term and dont cash any of it in until theyre well into the tax-paying part of their lives, they could still save a bundle.
And when it comes to decades of compound returns, the early years really are best. But how much might it be worth?
Investing for life
Lets suppose you plan to retire at 65, and once you reach the age of 18 you stash away 100 a week into your ISA (most people cant afford to use up the full allowance) for the next 47 years and buy shares every time youve built up a reasonable sum.
To get the most from your investments over the long term, you should reinvest any dividend, so well assume you do that too. Returns from shares can be erratic in the short term, but over the long term, investing in shares has provided an average annual return of around 6%.
By the time you reach 65, assuming that fairly modest 6% annual return with dividends reinvested, youll have a tax-free pot of around 298,000. Thats not bad, but if youd started out with a Junior ISA first, youll end up a lot better off.
What if your parents had started a Junior ISA for you when you were just five years old and had been able to invest 100 a month until you reached 18? Well, those extra 13 years would have more than doubled your tax-free nest egg to an amazing 660,000 the first 13 years of your Junior ISA would be worth more than the subsequent 47 years of your adult ISA!
Can you catch up?
What would you need to do to match that 660,000 starting at age 18? Youd have to more than double your monthly investments, to 220, to achieve the same eventual result. Its a sobering thought that, with the same annual rates of return, 47 years of investing 220 per month is matched by 60 years of investing only 100 per month.
And thats why you should get a Junior ISA for each of your children, and start it as soon as you can.
It’s hard to beat the idea of putting your ISA money into top dividend-paying companies with progressive cash-handout policies that have the potential to lift your income year after year. Our newest report, A Top Income Share From The Motley Fool, reveals a company that might just fit that bill.
It’s a company with a market cap of around 500m, so it’s not a high-risk tiddler, and dividends have been growing very strongly over the past few years.
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