Episode 345 - On this week's podcast I talk about Junior ISAs and the important role they can play in not only helping to educate children about investing but also providing a tax-free pot of money to help boost their finances when they are older. I also talk about an investing tool that provides an insight into how companies are tackling climate change and how they compare to their peers. Finally, Harvey joins the show to talk about how a little-known life insurance benefit can help if you or someone you know is terminally ill.
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Abridged transcript - Episode 345
Best Junior ISAs update
What are Junior ISAs?
Damien Fahy 4:00
First of all go back to podcast 244 (see the link in the resources section below) where I did a whole piece about Junior ISAs - as this episode is more of an update on that with some more information which people will find useful. On that podcast, I talked about what Junior ISAs are but just to quickly recap, they are a product that you can use to save for your child's future or invest for your child's future. The child gets access to the money at age 18. Only parents can open them and you can currently put £9,000 a year into a Junior ISA.
Money can go into a cash Junior ISA, or you can invest in a stocks and shares Junior ISA which means that you can invest in funds. With the latter, your capital is at risk.
As a parent, you do not have access to any money that goes into a Junior ISA. So once it's in there, it's for the benefit of the child and it becomes theirs at age 18, whether you like it or not.
Building a pot of money for your child’s future
Grandparents and other people can pay into a Junior ISA once it's set up by the parent, so it's a great way of starting to invest or build a pot of money for a child's future. The benefit of compounding means that you can grow a sizable sum over time.
Listen to our Millionaire Podcast Episode
Listen to our Millionaire podcast episode where I talked about Junior ISAs (see link in the resources section at the foot of this transcript).
It was an empowering episode and one of the most popular episodes we've ever done. I showed people how little money they have to put into a Junior ISA every month to potentially make their child a millionaire in later life.
I have Junior ISAs for my children, and I don't put in large amounts of money, it's more about doing regular small amounts that can grow over time. I choose the investments within the stocks and shares Junior ISAs in order to try and maximize the potential investment returns.
Best Junior ISAs
At the foot of this transcript is a link to an article that is regularly updated with details of the Best Junior ISAs, including cash Junior ISAs and Stocks and Shares Junior ISAs.
Best Cash Junior ISAs
If you want to just save your money in cash and don't want to put your capital at risk, then you can get about 2.5% on a cash Junior ISA at present. Most of the top four or five cash Junior ISAs are Building Societies and they pay 2.5% a year in interest e.g. Darlington Building Society. However, 2.5% is still well below the current rate of inflation.
Best Stocks and Shares Junior ISAs
If you want a Junior Stocks and Shares ISA where you can put in small amounts of money (because some of them do have higher minimums than others then take a look at Wealthify or Wealthsimple where you can save from as little as £1. Hargreaves Lansdown has a £25 a month minimum, similar to the minimum for an Interactive Investor Junior ISA. Alternatively, you can put in any lump sum.
If you're looking for low charges, Wealthify and Vanguard are attractive options. However, there is a real standout at the moment and it’s Fidelity. Currently, they have decided to scrap their platform charge entirely on their Junior ISA which effectively means that you can run your Junior ISA through Fidelity for nothing. And when I say nothing, that's the platform fee, you've of course got to pay the underlying fund charges that you invest in. That's true of any platform but that is a real innovation. That's something very different, that they’re actually trying to cut costs. Junior ISAs are a very long term investment especially if you really get into the idea of that Millionaire podcast I’ve mentioned, so having no platform fee is a real bonus.
The typical annual platform for most investment Junior ISAs is around 0.6% but can go as low as 0.25% with the likes of AJ Bell, however, they do apply dealing charges if you want to buy and sell things within it. Vanguard has a 0.15% annual platform fee with a max charge of £370 a year and no dealing charges. But you can only invest in Vanguard funds. But again, it's Fidelity you come back to because they don't charge an annual platform fee for Junior ISA accounts, they don't charge for any Fund trades either and you can invest in Vanguard funds too.
Direct payments by relatives/friends into Junior ISAs
The difficulty you have with a Junior ISA is that you might set it up as a parent and it'd be quite nice to let other people pay into it for your child. So maybe grandparents or friends, but the logistics of doing that are normally very difficult. It normally has to involve you as the parent even after the Junior ISA has been set up. That is a bit of a pain, but Wealthify is about to launch a feature that is going to allow people to pay into a Junior ISA on behalf of their say niece, nephew or friend's child via an online portal themselves. They can do it online and won’t even have to engage the parent if they don’t want to. So you could be a Grandparent deciding to put some money ad-hoc or regularly. This has started to open up the idea that people can make gifts into them, which is quite a nice idea, especially in the lead up to events like Christmas if you wanted to do something a bit different.
These innovations are happening in the Junior ISA space. In the past, people were quite reticent about the products because they were clunky, expensive and there wasn’t much option in terms of funds. But now that has changed.
What do people invest in via a Junior ISA - Interactive Investor Research
Interactive Investor found that after 10 years of Junior ISAs some clients had Junior ISA accounts valued at as much as £100,000 where people have been putting the money in over time. Some of those will have started with Child Trust Funds. They even mentioned that one lucky Junior ISA account holder has enough to technically buy the average UK detached house which is quite astounding. That person has put the money in, probably maxed out their allowances over time and then really engaged with the investment process as I talk about on our Millionaire podcast.
The top three most held investments in Junior ISAs that have over £50,000 in them in total are:
- The Scottish Mortgage Investment Trust - This is well known out there. I think it's been very popular because it did really well because of its focus on growth stocks and technology stocks.
- Fundsmith Equity - Another popular choice among investors. Again, that has some technology exposure in it, it’s run by Terry Smith and is a quite concentrated portfolio deliberately.
- FMC Investment Trust - I think some of that could be legacy because FMC was a very big player in the old Child Trust Fund market.
If you go down to slightly smaller sized portfolios it's the same funds that are appearing, but there is another one that's starting to appear. It's the Vanguard LifeStrategy 80% Equity Fund,
Pay your child first
The thing I love about regular investing via a Junior ISA is the idea that it’s paying your children first. We talk about paying yourself first but if you set up a direct debit that comes out of your account each month and pays into a JISA you are investing in your child’s future ahead of all your other bills. It’s a small amount of money but it does start to build up over time via compounding, as long as you are committed to paying into it. So do engage with Junior ISAa and do look at the links at the foot of this article.
Terminal Illness Benefit
Andy Leeks 14:54
Okay, so let's move on to the next piece and we're going to be welcoming Harvey back to the show who's going to be giving us some insight around something she's quite passionate about. Harvey, welcome back to the show. What are you here to talk about?
Harvey Kambo 15:07
Hi, Andy. Thanks for having me back on. So yes, Damien and I were talking about an article that we both read that was posted by the BBC earlier this week. And what it did was tackle this situation that people who are unfortunately at the end of their lives are facing when it comes to claiming benefits through the Department of Work and Pensions. So the article had quite a stark headline and indicated that 100 people had died this year, whilst fighting for this terminal illness benefit through the Department of Work and Pensions. What the benefit essentially does is it enhances benefits that the person might already be in receipt of. And if they're not already in receipt of them, it also fast tracks those benefits to that person, given that they're at the end of their life and they probably need a lot of financial support. Those benefits include personal independence payments (sometimes referred to as PIP payments) and ESA (which has Employment Support Allowance). So if you're in receipt of that, and you find yourself in this situation that can be enhanced as well. Also, Universal Credit payments can be fast-tracked and enhanced in that kind of awful situation. What in reality seems to have happened is that many people have died before they've actually realized these benefits through the Department of Work and Pensions, which is an awful thing to read and saddening in many ways, as we see people struggle at a time when they should really be at peace and dying with some dignity and not fighting these kinds of battles.
Andy Leeks 16:37
Yeah, I read this article too. Harvey, we've worked together in the protection industry looking at things like life insurance and critical illness benefits so this isn't new to us. But you and I both looked at it and we were startled by what's happening and shaking our heads. This really shouldn't happen. What seems to be the problem here, what's causing this kind of blockage?
Harvey Kambo 16:59
Essentially, it's not a new story, because we've probably seen these kinds of stories in the past, and they're now resurfacing. We have problems in certain areas of benefits through the Department of Work and Pensions, where perhaps sometimes the assessment process isn't supporting the person who's going through the process, as it should. So the article very much revealed instances where the assessment was perhaps portraying people who were quite clearly at end-of-life stage and very frail as perhaps better than they actually were. So you know, not trying to paint that in too poor a light but there's no skirting around the issue that they were looking at people who were severely underweight, were clearly end-of-life and couldn't make decisions in their favour.
Andy Leeks 17:47
Is this because doctors are reticent to sign a piece of paper, because in reality, they don't know when that person is going to pass away? And so sometimes they are holding it back as they feel worried about committing to something?
Harvey Kambo 18:05
In part, part of the assessment is that a medical professional would have to indicate that that person had less than six months to live. That's the criteria for fast-tracking the benefit and enhancing the benefit that the person would receive. But also there is a certain amount of assessment that's done through the Department of Working Pensions, and that perhaps isn't being as fair and as realistic as it could be through the article’s findings. And that's where you and I could see the alignment with a benefit called Terminal Illness Benefit that we've worked with for several years. And we can see the crossover in terms of the struggle in getting this type of benefit, and perhaps something that might help people in this situation.
Andy Leeks 18:47
Okay, so Terminal Illness Benefit - You mentioned it there, Harvey, it is a benefit that you can have with a life insurance policy. So explain how it works. I mean, it's different for different insurance companies, but in the main what are we talking about here?
Harvey Kambo 19:00
Yeah, so Terminal Illness Benefit usually escapes most people when they buy life insurance. So if you have a life insurance policy, or you're about to purchase a life insurance policy, do just check. Most reputable insurers, when they provide life insurance, will include something called Terminal Illness Benefit. Most insurance brokers, most insurance companies don't point it out, because it's a peripheral benefit that exists within your life insurance but in these kinds of circumstances, it can be extremely valuable. So what it allows you to do is to claim your death benefit early in a roundabout way. So if you find yourself in a situation where you're terminally ill and you've got less than 12 months to live, so 12 months being quite different to the six months that the Department of Work and Pensions requires, it's doubling that time period. If a medical professional can indicate that you've got less than 12 months to live, you would be able to go to your insurance company and say I'd like to claim on the Terminal Illness Benefit within my life insurance policy and take my Death Benefit early. And that in itself can help a person at that stage of their lives to avoid the kind of financial struggle and financial worry that that situation brings most of the time. But you've also got to bear in mind that the life insurance Death Benefit then isn't payable upon actual death.
Andy Leeks 20:24
Right. So it's like an early payment as opposed to an additional benefit.
Harvey Kambo 20:28
And something that's quite critical and important to look at is the work that's happening in both of these spaces. So with the Department of Work and Pensions, we see that MPs are lobbying for that time limit to be scrapped, essentially, because it's stopping payments reaching people in these situations. But also in the life insurance industry, we're seeing a similar appetite to get rid of these time limits. So there's a company called Guardian 1821 and they have looked at doing away with the 12 month time period that was usually applied to these kinds of benefits. So you would have to have a medical professional say that you were unlikely to survive beyond 12 months and they've now said that if you have stage IV cancer, motor neuron disease, CJD, or a number of Parkinson-Plus syndromes that you would automatically qualify for Terminal Illness Benefit, regardless of whether a medical professional could put that time stamp on your condition and the predictability of your lifespan. It's also worth noting that in situations where people claim this death benefit early, sometimes they worry that if they do live beyond that time period, that they might have to return the money. We can clarify that once the payment is made, and you have your Terminal Illness Benefit, they can't claim it back. It's a very unpredictable situation so if a doctor says you're unlikely to live beyond the next 12 months, and you do live beyond the next 12 months, the insurance company aren't going to come back and look for their money.
Andy Leeks 22:00
Yeah, really, what we want to do in this piece is highlight not only the fact that Terminal Illness Benefit is there for people to use, but also really to shine a light on the insurance industry and say that they're not trying to get out of paying out claims, they're not in the business of doing that. They actually want to pay out claims that are correct and within the policy terms and conditions, because it's good for them; they're able to then promote that they pay out 98/99% of their claims. Generally, the 2% or 3% that they don't pay out, there's a reason for it and you can dig into the details. In fact, we write articles about claim stats with insurance companies. So let's finish off this piece then Harvey by explaining why this benefit is so useful. What can people use it for? Why is it so important to get it?
Harvey Kambo 22:45
I think a lot of this goes back to the notion of dying with dignity for a lot of people who are at the end of their life. The last thing they want to do is to start worrying about their financial affairs, they usually want to be able to be in their own surroundings with their loved ones, not worrying about those things as well for them. So it may mean that you can pay off some debts, it may mean that you can keep the lights on in your home by paying your utility bills, putting food on the table when it's very unlikely that you'll be earning. What it also does is it perhaps gives you access to carers. We know that there is an issue with carers in the system now, that it's very difficult to get carers and perhaps get carers that will visit you enough times in the day to give you the kind of support that you potentially need at that time of your life. And it may also allow you to put some money in the hands of people who need to make arrangements for your funeral. And that kind of thing can be quite priceless and it's giving you peace of mind at a time when emotionally things can be quite difficult.
Andy Leeks 23:46
I've heard stories of people being able to use that money to provide almost an income for a family member who's had to take a career break to help look after them. And I think that's a really good use of the money. I also like to think that if you're well enough to be able to go on a holiday and create moments, memories at the end of someone's life that's really special. There's actually a lot of good to come out of this story today, isn't there?
Harvey Kambo 24:08
Absolutely. I mean, money is money at the end of the day, Andy, but you and I, we understand that money can lessen burdens and enhance your life in ways that may not be possible without it. So we can't ignore these benefits that exist within life insurance policies, we want to make sure that our listeners know about them so that if they have a family member or anyone going through this, that they perhaps probed them to look at their life insurance policies and see whether that benefit exists and whether they might actually be entitled to some money during their lifetime that would ease the pressures.
Climate investing made easy
Andy Leeks 24:41
Harvey, thanks ever so much for coming onto the show again this week. And so moving on to the last piece of the pod then and this is just a quick piece. It's topical, isn't it? Cop26 has been going on and Damien, you’ve been doing some digging around and found something you liked. You got quite excited and sent it to the team and we were having a play around with it.
Damien Fahy 24:59
Yeah, and you didn't get as excited as me but that doesn't mean it's not going to be on the podcast! Now, what it is to do with, like Andy said, is Cop26. And we've seen lots about climate/temperature targets, and whether countries would adhere to them and whether there'd be some kind of agreement. Now, I was doing some research and I came full circle and ended up on a tool that I'd used before.
But the reason I want to talk about it on the podcast is that the tool has evolved. Back on Podcast episode 329, I talked about an ESG rating tool by MSCI. I’ll link to it in the show notes below so you can find it.
The tool now has a new part added to it so it's basically doubled in size. So previously, you went on the tool and you could put in a company name (there were about 2000 companies in fairness) where you could search to see what its ESG ratings was, so that's their ethical social governance rating.
It will look at a whole range of different factors, including corporate governance, how they treat employees, products, carbon footprints etc and pull together an ESG rating for the company compared to its industry.
So effectively, it gives you a nice way to be able to look at companies. You could put in a company like Tesco, for example, or Ford Motor Company, and you get a rating, see how they compare to their peers in their sector, whether they’re leaders, average or laggards. Then you can choose whether you might want to invest in them, use them as a company, buy products from them or not. And even if you don't buy shares directly, you can look at funds that you invest by looking at their factsheets and seeing the top 10 holdings in that fund and run them through the tool.
But the tool has now been improved and they've now included an implied temperature rise measure. So now you can use the tool, put in the company's name, and you get a nice little graphic that shows a thermometer that will be green, amber or red and it will tell you what the implied temperature rise is for that company. It will show you whether they are aligned with the two-degree centigrade global climate change target or whether they're misaligned or lagging. It can even show you if they're aligned with a much higher temperature rise, as much as nearly four degrees.
So as consumers and investors, you are empowered through the information that exists like this, to see whether the companies are on target to be able to meet some of the long term temperature targets that are causing concern with regard to climate change. So you can make decisions on your investments and the things you buy based on this tool. Not every company will be on there but it is empowering you as a consumer.
- MTTM Podcast Episode 244 – Winning winter portfolios, Best Junior ISAs & getting insurance with depression
- MTTM Podcast – How to become a millionaire
- Best Junior stocks and shares ISA
- MTTM Podcast Episode 329 – Travel insurance & Covid, ESG rating tool & online security MOT
- ESG ratings and climate search tool
- Hundred people die fighting terminal illness benefits
- Junior ISAs turn 10