Ask the expert: Is this a hack for contributing £29,000 to an ISA?
Fidelity personal financial specialist Marianna Hunt is back on hand to answer your burning questions, and today a reader wants to know if they’ve found a hack on UK ISA rules.
Q. My grandson is turning 18 this year. I want to give him some money to invest in his ISA. Is it true that you can contribute, in the same tax year, £9,000 into a Junior ISA and then the full £20,000 into an adult ISA? Separately, how should he invest this money for the long term?
A. You’ve struck upon an interesting quirk in the ISA rules. Yes, because your grandson turns 18 during the tax year, he could contribute up to £9,000 to a Junior ISA before his birthday and then use the full adult ISA allowance of £20,000 afterwards.
In total, he would be able to invest £29,000 into tax-efficient ISAs within the same tax year, significantly more than the normal allowance of £20,000 per year for an adult investment ISA.
This sum could give your grandson a fantastic head start with his long-term savings.
As for where to invest, that really depends on when he expects to use the money. You say “for the long term” which I am going to assume means he won’t be needing these funds within the next five to 10 years.
For many people investing over a long period, a simple low-cost fund that passively tracks the performance of global stock markets is often the most straightforward solution.
There are plenty of these available. When selecting a fund, make sure to look at the on-going charges and which global stock market index it tracks.
Selecting a fund
While these indices all appear on the surface to track the performance of stock markets globally, there are nuances between them. The FTSE Global All Cap, for example, includes smaller companies and companies in emerging markets, while the MSCI World does not include any emerging market listed companies.
Young people with an investment time horizon of 10 years or more can often afford to take on more risk than average. Companies based in emerging markets, such as parts of Asia and Latin America, are seen by some investors as higher risk but offering the potential for higher rewards.
The same is true of smaller companies, which some believe have potential for greater growth. Of course, in both cases, there are no guarantees.
Your grandson may decide he wants to get exposure to these areas by choosing a global tracker fund that includes them. However, he may want a more focused exposure to them – in which case he could consider, alongside his global tracker, a fund specialising in emerging markets and/or smaller companies.
You can also do this via passive funds, which simply track the performance of these parts of the market overall. However, some investors prefer to take an active approach in these more specialised areas and select funds where human managers attempt to select those companies they believe will deliver the best returns rather than simply investing in the market as a whole.
In the Fidelity Select 50, a list of our 50 favourite funds, we have several options for funds specialising in smaller companies and/or emerging markets, including the Lazard Emerging Markets Fund and the Fidelity Asian Smaller Companies Fund.
It’s a good idea to review the investment portfolio regularly to ensure it still aligns with his time horizon and goals. You could offer to help your grandson with an annual review, which could be both a nice bonding activity and a chance for you to see how your generous gift grows with time.
Please remember this is not financial advice. If you’re unsure about what’s right for you, you should speak to a qualified financial adviser.
Do you have a personal finance question for our expert? Email [email protected]