We all want to do what’s best for our kids. But putting money away to give them a financial head start in life isn’t always easy — especially with rising costs and demands!
If you are in a position to start saving for your child’s future, however, then a Junior ISA could be a good place to start.
So, starting with the basics, what is a Junior ISA, exactly?
Well, in simple terms, it’s a tax-efficient Individual Savings Account (ISA), introduced by the government in 2011 to replace Child Trust Funds.
Often abbreviated to JISA, they can be a good way to build a child’s future wealth. And, within this Junior ISA guide, we’re going to explore all the ways how!
Looking for a specific section? Use the links below to navigate directly to the information you need.
- How does a Junior ISA work?
- Junior ISA types
- Junior ISA allowance
- Benefits and considerations
- Product comparisons
- Eligibility
- How to open Junior ISA
How does a Junior ISA work?
When you pay into a Junior ISA, your child won't pay any tax on interest they earn or returns they make from the money. This means your little one gets to keep everything, after fees and any other charges have been taken by the provider.
One of the most important aspects of a Junior ISA is that the money belongs to the child — and no one else can access it.
The funds in a Junior ISA are locked away until your little one's 18th birthday, which is when they'll gain access to the money (and the account becomes an Adult ISA). At that point, it’s up to them whether they withdraw the money, or carry on saving and investing it.
It's also worth noting that once they child turns 16, there is an option for them to take over the control and management, should the parents wish to pass that responsibility to them.
What are the types of Junior ISAs?
There are two types of Junior ISA: a Junior Cash ISA, and Junior Stocks & Shares ISA.
While they’re both tax-efficient options to help children save money from an early age, there are a few key differences to be aware of.
Junior Cash ISA
With a Junior Cash ISA, your child earns a rate of interest. However, if this rate doesn’t exceed the level of inflation, then their savings will lose value in real terms, because their money will buy less in the future. A Junior Cash ISA is essentially the same as a bank or building society savings account, just without the need to pay income tax on earnings above £1,000 (if they generate over £100 in interest).
Junior Stocks and Shares ISA
With a Junior Stocks and Shares ISA, your little one's money is invested in assets – like shares and bonds – with no tax to pay on any capital gains or dividends from their investments. It’s important to remember that with investing, there’s always a chance your child could get back less than you put in.
Because your child's returns won't be tied to fixed (or variable) interest rates, however, this also means you could potentially get higher long-term returns than with a Junior Cash ISA.
Please note that your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
What is the Junior ISA allowance?
For the current tax year, you can pay a maximum of £9,000 into a Junior ISA — a figure known as the annual Junior ISA allowance. (Just as an FYI, the annual allowance was changed to £9,000 for 2020/21; for 2019/20, it stood at £4,368. It’s also subject to change in the future.)
You can put the entire allowance in one Junior ISA, or split it between the two types however you like.
You have until midnight April 5th to use the annual allowance, or you’ll lose it forever. And, even though you can't carry any of your remaining allowance over to the next tax year, you do get a new allowance to use on April 6th each year.
Unlike an Adult ISA – where you can open more than one new one every tax year – your child can only have one Junior Cash ISA and one Junior Stocks and Shares ISA throughout their childhood. And yes, they can have one of each type, meaning you can save and invest for them at the same time.
Junior ISA benefits
Regardless of whether you choose a Cash or Stocks and Shares version, a Junior ISA comes with three main benefits.
It’s tax-efficient
As we’ve already mentioned, one of the biggest benefits of a Junior ISA is that you don't have to pay tax on any interest or returns. And, with no capital gains or income tax to be paid by the child when they turn 18 either, it really is one of the most tax-efficient ways to build their wealth.
It’s locked away
Because the money in a Junior ISA can’t be accessed until a child turns 18, the temptation to dip into it is essentially null and void! As a result, Junior ISAs are a reliable, consistent way to build their wealth over a long period of time.
It’s versatile
When it comes to raising a little one, it's handy to have a helping hand, right? Well, whether it's family or friends, a Wealthify Junior ISA lets you invite anyone to contribute towards and grow your child's savings (something that isn’t an option with all providers).
Despite the benefits, there a few potential drawbacks to consider with Junior ISAs. Inflation, for example, could eat away at the value of money in a Junior Cash ISA, making it worth less in the future than it is today. Likewise with a Junior Stocks and Shares ISA, stock market swings could also see your child end up with less money than had been put into it for them.
Also, what happens if your child needs that money before they’re 18? Might a traditional savings account they can access be more suitable, with that in mind?
These are all things to consider — as well as the following product comparisons.
Junior SIPP vs Junior ISA
Even though we don't offer a Junior SIPP (Self-Invested Personal Pension) here at Wealthify, we still want to help you compare both, so you can choose the most suitable product for your child.
Just like a Junior Stocks and Shares ISA, a Junior SIPP is an investment product that's free from both income and capital gains tax. That's where the similarities end though, because you can only pay £3,600 into a Junior SIPP each year. And, unlike a Junior ISA, every Junior SIPP contribution gets a 20% tax relief.
Because a Junior SIPP is specifically designed for your child's retirement, it’s also important to understand that the money within it is locked away for much longer than a Junior ISA. As such, they won't be able to access the money in a Junior SIPP until the minimum retirement age, which is currently 55 (changing to 57 in 2028).
Junior ISA vs Savings Account
By now, you'll know that the money in a Junior ISA can't be accessed until your child is 18. And, while this lack of access ensures they've got a lump sum going into young adulthood, it also restricts their ability to learn more about hands-on, real-life money management. So, if you want your child to have access to their money, then a savings account could be a better option.
Child Trust Fund vs Junior ISA
Child Trust Funds (CTFs) were the name given to savings accounts that formed part of a UK government scheme.
If you’re disappointed with the returns delivered by your child’s CTF, or think you’re paying too much in fees, transferring it to a Junior ISA could be a consideration for you.
Opened by parents or the government for every eligible child born between September 1st, 2002, and January 2nd, 2011, new CTFs can no longer be set up (and you can’t have a CTF and JISA open at the same time).
Featuring the same maturation age, contribution limit, and ability to be either cash or stocks and shares products, CTFs were replaced by Junior ISAs for children born from January 3rd, 2011.
Transferring a CTF to a Junior ISA
Although you can’t open a new CTF anymore, certain providers – including Wealthify – let you transfer existing ones to a Junior ISA.
Junior ISA eligibility
As a parent or guardian, you can open a Junior ISA for your child as long as they:
- Are under 18 years old.
- Live in the UK.
- As mentioned above, if they do have a Child Trust Fund, you can transfer the balance to a Wealthify Junior Stocks and Shares ISA. Our Junior ISAs can be opened from birth, up until the child is 18.
How many Junior ISAs can a child have?
Your child can have a maximum of two Junior ISA: one Junior Cash ISA and one Junior Stocks and Shares ISA. So, if you want some of your child's money to be saved and the rest invested, this is a good way to get the best of both worlds.
What happens to a Junior ISA at 18?
Once your child turns 18, the Junior ISA will mature into an Adult ISA. They can then choose to:
- Carry on saving or investing.
- Withdraw some money.
- Move it to another ISA or provider.
- Close the account.
When your child is 18, all account responsibility will pass to them — and they’ll need to contact us and let us know what they’d like to do with their Plan. Once we’ve confirmed their details, they’ll be able to access their money.
Who can open a Junior ISA?
The registered contact is the person who can open the Junior ISA; they must be the child’s parent or legal guardian, and evidence may be requested to prove this.
As a registered contact, you’ll be responsible for maintaining the Junior ISA account.
This means you’ll need to keep any documents about the account stored safely. You’ll also need to let your provider know if any of your details change, as they might need to be able to contact you and your child when they reach 18.
Even though they might not be the ones responsible for opening your child’s Junior ISA, don’t forget that family and friends can contribute towards a Wealthify one, too.
How to open Junior ISA
By now, you should hopefully be able to answer the following question: “What is a Junior ISA?”
Before taking the final step of opening a Junior ISA, however, it’s important to make sure you’ve chosen a provider that’s right for you. Things to consider (that might vary from provider to provider) include:
- Management fees.
- The interest rate (if choosing a Junior Cash ISA).
- Past performance (if choosing a Junior Stocks and Shares ISA).
- Customer service levels.
- Ease-of-use.
If, after doing all your research, Wealthify is the company you’d like to open a Junior Stocks and Shares ISA with, we’ve made the process as simple as possible:
Step 1: Choose your Plan
Pick from five investment styles, our Original or Ethical Plan, and tell us how much you want to invest for your child via a one-off payment or regular Direct Debit.
Step 2: Take our Suitability Quiz
This is our way of helping you start your child's JISA in a way that's right for your circumstances and attitude to risk.
Step 3: We build and manage your Plan
If you pass our Suitability Quiz, our experts then get to work on building and managing your child's Plan, keeping it in line with your chosen style.
Step 4: Access to the JISA
Your child will have access to their JISA on their 18th birthday, at which point the money can be used as they see fit — including reinvesting it, potentially.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Wealthify does not provide financial advice. Seek financial advice if you are unsure about investing.
Resources:
https://www.moneyhelper.org.uk/en/savings/types-of-savings/junior-isas
