If you’re thinking about helping your children with their financial future, you may like to think about starting a Junior ISA (JISA) or junior pension.
Junior pension versus Junior ISA
Both have the potential for tax-efficient long-term growth and both have their advantages and disadvantages.
In this short article, we look at the pros and cons to help you decide.
First, here’s what they have in common…
Both are very tax efficient and there’s no income tax or capital gains tax on any investment growth.
Neither affects the amount you can pay into your own ISAs or pension.
You can usually start with as little as £20 a month.
Grandparents, other relatives, godparents and friends can pay in too but only up to the maximum allowable per child: £4,368 for an ISA and £2,880 for a pension.
Both can invest in stocks and shares but such investments should be considered long term – at least five to ten years. If you don’t want to take any risks with your money, you can choose a cash JISA which will pay a fixed rate of interest.
With stocks and shares, the value of your investment can go down as well as up and you may get back less than you put in.
The JISA or pension must be opened by a parent or legal guardian.
Both ISAs and pensions can be transferred to another provider at a later stage if the child so wishes.
Now, here are the important differences…
You can save £4,368 a year into a JISA but only £2,880 a year into a junior pension.
However, the money you pay into a pension is topped up by the government in the form of tax relief. So your £2,880 a year into a junior pension will be topped up with 20% tax relief to a total of £3,600. That’s potentially £720 free from the government each year.
You can’t continue paying into a JISA once the child has reached 18. You can keep paying into a pension but any tax relief will be based on the child’s circumstances and be subject to the rules on annual allowances.
The child can take control of their JISA investment strategy at age 16 – for a junior pension it’s 18.
Your child gets access to their JISA money at age 18 and they can spend it as they wish. Or they can roll it over into an adult ISA and hope to benefit from ongoing investment growth.
Pension money can’t usually be touched until at least age 55 and that might increase in the future. So it might be too late for paying off their student loan or as a deposit on a house.
There is no limit on the amount that can be built up in an ISA over the course of a lifetime but for a pension any withdrawals over £1,055,000 attract a tax penalty of up to 55%.
JISA money is tax free on withdrawal. Only 25% of pension money is tax free, the rest is taxed as income.
The choice is yours…
So there you have it. Both JISAs and pensions are tax-efficient options for long-term savings but there are important differences, particularly in the tax treatment on withdrawals and the age at which your child can take the money out.
Any child would be grateful for the financial boost at whatever stage of life and if you can’t decide you could always give them one of each!
Important note: The value of your investments can go down as well as up and is not guaranteed. All tax and allowances figures are as at April 2019. Tax rules can change and what it means for you may depend on your individual circumstances. For more information visit www.hmrc.gov.uk
Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.