Junior ISAs are growing in popularity, with 794,000 subscribed to in 2016/17. We take a closer look at how they can help you save for your children’s future.
What is a Junior ISA?
How does a Junior ISA work?
A Junior ISA is a type of tax-efficient savings account that you can open in your child’s name and make contributions on their behalf. There’s a limit to how much you can pay in each year – for the tax year 2018/19, it’s £4,260.
Any child under the age of 18 who is a UK resident can have a Junior ISA. The account can be set up by the child’s parent, legal guardian or the child themselves if they are 16 or 17. A child can also open an adult cash ISA once they turn 16.
Any money that is held in the account belongs to the child. They cannot withdraw it until they turn 18, except in exceptional circumstances.
What types of Junior ISA are there?
There are two types of Junior ISA – a cash Junior ISA and a stocks and shares Junior ISA. Your child can have one or both of these, although the total paid in cannot exceed the allowance set by the Government for the tax year.
- Junior cash ISA: This works in the same way as an ordinary savings account whereby the capital is protected and interest is earned on the amount saved. Banks and building societies offer a range of Junior cash ISAs with interest rates of around 2.5%-3.5%. Neither you nor your child will have to pay tax on the interest accrued.
- Junior stocks and shares ISA: With this type of ISA, you invest in the stock market. While investments are riskier than cash, they can give you greater rewards. A stocks and shares ISA gives you access to a wide range of investments such as funds, shares and bonds, and no personal tax is payable on investment gains you make. Investing is a long-term savings strategy, so it can be a good option if you start when your child is young. If your child is over 13, it might not be suitable.
Who can contribute to a Junior ISA?
Once an account has been set up, parents, friends and other family members can all save on behalf of the child as long as the total doesn’t go over the annual allowance. Money put in is a gift to the child and cannot be accessed by them until they turn 18.
You can set up regular payments by direct debit or make one-off payments at any time. Drip-feeding money into a stocks and shares ISA can help to smooth out the ups and downs of the market, but it’s entirely up to you how you choose to invest.
What happens when your child turns 18?
The Junior ISA account is automatically rolled over into an adult ISA. Your child can continue to save or take the money out and spend it how they like. Of course, there are no guarantees that they will spend it on something worthwhile such as driving lessons or a college course – you have to trust that they will be responsible with the money you’ve carefully saved for them.
Can you transfer a Junior ISA?
You can switch ISAs from one provider to another whenever you like, but a child can only have one Junior cash ISA and one Junior stocks and shares ISA at any one time.
If you do transfer, ask your new provider to handle the process as this will ensure the ISA doesn’t lose its tax status.
If you already have a Child Trust Fund, you cannot also hold a Junior ISA at the same time. However, you do have the option to transfer a Child Trust Fund into a Junior ISA at any time.