Junior ISA Guide
Individual savings accounts (ISAs) aren’t just for grown ups – children have their own version, too. It’s called a Junior ISA and works in broadly the same way as the adult version.
You can open a Junior ISA if your child is under the age of 18 and live in the UK. However, kids with child trust funds aren’t eligible. In other words, if your child was born between September 1 2002 and January 2 2011, they will not be able to save in a Junior ISA as well.
The government does not contribute to the Junior ISA and it must be opened and managed by someone with parental responsibility for the child. Anyone can then pay into the account up to £4,000 each year– and any interest or gains are tax free.
The money in the Junior ISA belongs to the child. However, they cannot get their hands on the cash until they are 18 as it is designed as a long-term savings account. At 18, they can either cash in the Junior ISA and spend the money how they choose, or they can roll it over into a standard adult version of an ISA
When the child reaches 16, they can take over the management of the account if they wish – though they’re still not allowed to touch the money. They can also pay up to £15,000 in a standard ISA, without affecting their Junior ISA allowance. The advantage of an adult ISA is the greater flexibility as the child can access the money before they reach the age of 18.
Cash or shares?
There are two types of Junior ISA. The cash version is simply a tax-free savings account. There is a range of accounts on offer from banks and building societies, including variable and fixed deals.
Some people prefer to invest in the stock market if they are saving for their children’s future, in which case a stocks and shares Junior ISA might be a more attractive option. Again, there is a range of accounts on offer, from UK funds to more exotic accounts that invest in emerging markets.
Many advisers recommend a stocks and shares Junior ISA for a child because the lengthy term of possibly 18 years allows plenty of time to ride out the ups and downs of the stock markets. However, you must be comfortable with the dangers of investing in stocks and shares and bear in mind that your capital is at risk and returns are not guaranteed.
Monitor your Junior ISA
It’s a good idea to keep an eye on your child’s Junior ISA as rates can change and you could end up with a poor deal. You are free to switch your Junior ISA at any time if you aren’t happy with the performance. If you decide to switch, you can either transfer to a different type of Junior ISA from the same provider or to a different provider.
Advantages of a Junior ISA
Everyone – including children – has a personal tax free allowance of £10,000 in the current tax year. We also benefit from a capital gains tax allowance of £11,000. So what is the advantage of a Junior ISA? After all, few children earn enough interest on their savings or make enough profit from the sale of assets to breach the tax-free limits.
Some parents favour Junior ISAs over standard children’s savings accounts because of the restriction on withdrawals. If the child cannot access the money until they are 18, they cannot squander the cash on a spontaneous spending spree.
Junior ISAs also have a tax advantage over standard children’s savings accounts. If a parent puts money into a savings account for a child and it earns interest of more than £100, it is taxed as the parent’s own. With a Junior ISA, the money is classed as the child’s and all interest is tax free.
Compare Junior ISAs
Whether you are looking for a cash Junior ISA or prefer to invest in stocks and shares, it’s quick and easy to compare Junior ISA with MoneySupermarket. Our online service is free and independent – and committed to finding you the best deal.