Junior ISAs: What do you need to know?

Most adults are aware of the importance of using your annual ISA allowance each tax year – but don’t forget that children have their own ISA allowance too.

Junior ISAs are one of the best ways to save for your children’s future, as returns are free from income tax and capital gains tax. Funds are locked away until children reach the age of 18, avoiding any temptation for them to dip into their savings when they are younger.

Here, we take a look at how exactly Junior ISAs work, who can open these accounts, and how much you can pay in – as well how to make sure you get the best deal possible.

What are Junior ISAs and who is eligible for them?

A Junior ISA is a form of children’s savings account for those who have missed out on Child Trust Fund accounts. Any child born on or after January 3, 2011 and children born before 1 September, 2002, are eligible for Junior ISAs. Any child who already has a Child Trust Fund does not qualify for a Junior ISA.

As with standard ISAs, there are two different types of Junior ISAs available – a Junior cash ISA and a stocks and shares Junior ISA. Children will be able to hold one cash and one stocks and shares Junior ISA at a time. 

How much can I invest in the Junior ISA?

This tax year (2012/2013) the Junior ISA allowance is £3,600 this year, rising to £3,720 next tax year (2013/14).  Friends, grandparents, relatives and godparents can all contribute to the accounts if they want to.

Who has control over Junior ISAs?

Until the child reaches 16, accounts will be managed on their behalf by a person with parental responsibility for that child. At age 16, the child can assume responsibility for their own account if they want to, and when they reach the age of 18, the ISA will by default become an adult one in their name, which means they will be free to spend the money on anything they want.

Which should I choose – a stocks and shares or a cash Junior ISA?

This will depend entirely on your attitude to risk, and your investment timeframe. Stocks and shares ISAs are risky, so you will need to be prepared for the fact you could get back less than you put in. However, over long term periods, stocks and shares do tend to out-perform cash accounts, so you may consider this a risk worth taking. Cash ISAs, meanwhile, are more appropriate for those who don’t want to take any risk with their savings, although bear in mind that inflation will erode the value of your money over time.

Where can I find the top cash Junior ISA rates?

Currently Halifax offers a rate of 3.00% tax-free on its Junior ISA account, but this rate increases to an impressive 6.00% if a person with parental responsibility for the child also has their own ISA with Halifax.

According to Halifax, those that take advantage of the current £3,600 annual limit, at the 6.00% rate, from birth to the age of 18, would end up with a tax free savings pot of £117,936 when the product matures into an adult ISA. This is £31,115 more than an account paying 3.00% tax-free.

The Halifax Junior ISA requires a minimum opening balance of £1, and can only be opened in branches.

Alternative options for those who don’t want to invest their adult allowance with Halifax include Skipton Building Society’s Junior ISA, which pays 3.02% tax-free on a minimum investment of £1. This account can be opened in branches and by post.

Buckingham Building Society’s Junior Cash ISA, meanwhile, pays 3.00% tax-free on a minimum investment of £10 and Scottish Building Society’s Junior ISA pays 2.60% on a minimum investment of £1. Both these accounts can be opened in branches or by post.

What about stocks and shares Junior ISAs?

There is a huge array of stocks and shares Junior ISAs available and many can be opened with a monthly investment of £30 to £50, or with a £100 lump sum. Providers include The Children’s Mutual, JP Morgan, F&C Investments, Prudential, Alliance Trust, Hargreaves Lansdown and Family Investments. You can compare deals here.

JP Morgan has calculated that if a parent invested the full allowance of £3,600 each year in stocks and shares, they could accumulate savings of over £100,000 by the time their child reached 18, based on growth of 5% a year.

However, bear in mind that the amount your child ends up with will depend on a variety of factors, including inflation, investment returns and how much you contribute.

Always check charges on stocks and shares Junior ISAs carefully before investing too, as these can eat into returns.

Remember that you can transfer the funds to another provider at any time if you wish. However, no transfers can be made between CTF and Junior ISA providers.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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