Who is eligible?
Junior ISAs are simply tax-efficient savings plan for children under the age of 18, but they are not available to everybody.
You must be a 16 and UK resident to open a Junior ISA on behalf of a child, or be a child aged 16 or over but under 18 to open one on yourself.
A child is not eligible for a Junior ISA if it qualified for a child trust fund (CTF). This rule basically excludes all children born between September 1, 2002, when CTFs were established, and January 3, 2011, when the government stopped all contributions to CTFs.
The government doesn’t make any contributions to Junior ISAs, but anyone else can chip in – parents, grandparents, relatives or friends.
Rates are also generally better than those offered on CTFs. That’s why it’s good news that transfers from CTFs into Junior ISAs were permitted from April 2015.
The government doesn’t make any contributions to Junior ISAs, but anyone else can chip in – parents, grandparents, relatives or friends...
Cash or shares
There are two types of Junior ISA. A cash Junior ISA is just like a savings account, except the interest is tax-free.
Stocks and shares Junior ISAs, meanwhile, invest in the stock market.
There is no additional income or capital gains tax to pay on any growth in a stocks and shares ISA.
Risk and reward
The choice of ISA depends largely on your attitude to risk and the age of your child.
A stock market investment is more risky than a savings account and you could lose some or all your money if the market turns against you.
However, shares typically outperform cash over the long term, so if your child is very young you might be prepared to take the bigger risk in the hope of bigger reward.
There is a limit on the amount of money you can put into a Junior ISA.
The annual allowance in the 2017/18 tax year is £4,128.
The same limits apply to Child Trust Funds.
Split the cash
The money can be split between the two types of Junior ISA, or you can put up to the maximum in just one if you prefer.
For example, you might decide to deposit the full amount in cash.
Or, you might choose to save half in a cash account and half in shares.
It’s entirely up to you, as long as you don’t exceed the total allowance for any one tax year.
The government doesn’t make any contributions to the Junior ISA, but anyone else can contribute – parents, grandparents, relatives or friends.
The child cannot touch the money until he or she is 18, when the Junior ISA turns automatically into a standard ISA.
After that point, the child can take the cash or continue to save.
If the child is under 16 the parent or legal guardian - known as the registered contact - must open and manage the Junior ISA.
However, the money belongs to the child, who can manage the account from the age of 16, and spend the money at18.
Unlike ‘adult’ ISAs, you cannot open a series of Junior ISAs year after year. But you can use each year’s annual allowance.
So once you have taken your Junior ISA allowance (which can be split between cash and stocks and shares), you must either put subsequent years’ allowance into the original account or transfer all the money from previous years into a new one.
Switching Junior ISAs
You can only have one cash Junior ISA and one stocks and shares Junior ISA at any one time. You can also switch between the two.
So, if you open a cash ISA at the start of the tax year, you can also open a stocks and shares ISA later in the year. You can then switch from cash to shares and vice versa.
You can also decide to switch your ISAs to a different provider to get a better return.
But you would have to transfer all the money so that you were left with only one cash and one stocks and shares Junior ISA.
When you reach 16 you are eligible for to open a standard ‘adult’ cash ISA too.
Some firms do not accept transfers into their Junior ISAs. You might also have to pay a penalty if you want to switch money from a cash Junior ISA that pays a fixed rate for a set term, so check the small print carefully before moving your cash.
The big attraction of Junior ISAs is their tax efficiency, but your child might not even pay tax.
Everyone under the age of 65 can earn tax-free income – including savings interest – of up to £11,500 in 2017/18, plus on top of that the first £1000 in savings interest is tax-free, so it is unlikely that your little one is liable for income tax unless he or she is a junior Rockefeller.
The £100 rule
You might therefore want to consider shunning Junior ISAs in favour of an ordinary children savings account that pays a higher rate of interest, particularly if you want your child to be able to make withdrawals from their savings before they reach the age of 18.
However, you have to watch out for the so-called £100 rule. This states that, if the money in the savings account is a gift from a parent and generates more than £100 in interest a year, all the interest – not just the slice above £100 – is taxed as the parent’s own.
Pros and cons
Junior ISAs do not suit everybody. Some people want more control over how their children’s money is spent. The tax advantages of Junior ISAs are also irrelevant to some savers.
However, a Junior ISA might be a good option if you are in danger of breaching the £100 rule, or your child already earns close to the tax-free threshold.
As the Junior ISA becomes a standard ISA when the child reaches 18, your offspring can also continue to earn tax-free interest, even if they have started work and are liable for income tax.
Find the best deal
You can compare rates on Junior ISAs here at MoneySuperMarket, to help you find the best product for your needs.