Parents, you know saving for your children’s futures is important, but do you know the best way to do it? At Kale Accountancy, we’re all about equipping you with sound financial knowledge to make the best decisions for your family. Today, we’re tackling Junior ISAs (or JISAs for short) – a type of account that lets you save or invest for your child in a tax-efficient way.
We’ll be delving into the different ISA options available; the benefits and how Junior ISAs compare to child savings accounts. You’ll also find answers to your FAQs about Junior ISAs, and by the end of this article, we hope you’ll be able to make a well-informed decision on whether you should open a junior ISA for your child.
PLEASE NOTE THE FOLLOWING ARTICLE IS FOR INFORMATION ONLY AND DOES NOT CONSTITUTE FINANCIAL ADVICE.
PLEASE CONSULT WITH YOUR QUALIFIED FINANCIAL ADVISOR BEFORE PROCEEDING WITH ANY JUNIOR ISA PRODUCTS
What’s the difference between a Junior ISA and an ISA?
In principle, Junior ISAs work much like normal/adult ISAs, allowing for tax-free savings or investments. However, Junior ISAS are for children under 18 and must be opened by someone with legal ‘Parental Responsibility’ for the child or the child themselves if they are aged 16 or 17.
With a Junior ISA, you can save up to £9,000 for the current 2023/2024 tax year, whereas adults can save up to £20,000 in a standard ISA. As an adult, you can open a JISA for each of your children, and you and anyone else who wishes can contribute up to the £9,000 limit per JISA each year without affecting your adult ISA allowance.
Another key difference is that the money saved or invested in a Junior ISA is locked away until the child reaches 18. From 16, they can take ownership of their JISA and make their own investment decisions, such as switching JISA providers or transferring money from a Cash JISA to a Stocks & Shares JISA. Then, on their 18th birthday, they are entitled to withdraw the money and do whatever they please with it. If they choose to leave it where it is, the Junior ISA will switch to a standard ISA.
What is the best type of Junior ISA?
There are two different types of Junior ISAs. The first is Junior Cash ISAs, which are essentially tax-free savings accounts. The main benefit of Junior Cash ISAs is that the money you invest is considered safe and will accrue a defined amount of interest. The downside is the rate of inflation may increase quicker than your money.
The second type is a Junior Stocks and Shares ISA. The return on your investment will depend on the performance of the stocks and shares you invest in. Stocks and Shares ISAs are considered more risky but may offer higher returns. If your child is younger, investing will likely be more advantageous than saving, as the stock market usually outperforms cash. But there is no guarantee, so your decision largely depends on your attitude to risk.
Remember – you don’t have to pick between a Junior Cash ISA and a Junior Stocks and Shares ISA. You can open both types of Junior ISAs and split the £9,000 (max limit for 2023/2024 tax year) between them if you wish to. You can also switch providers as often as you like. The only rule is that you can only have one of each type of JISA wrapper at one time. Please remember that if you transfer JISA providers, you must complete a transfer form to get your money moved from the old provider to the new one. Do not move it yourself, or you will lose all tax benefits.
Should I open a Junior ISA or savings account?
One of the benefits of opening a Junior ISA over a savings account is that cash is locked away until a child turns 18. There’s no chance of dipping into the savings, so if you put money in, you will have funds to give your child when they’re 18. Parents can only withdraw money from a Junior ISA in exceptional circumstances detailed here.
Another reason you might choose a Junior ISA over a savings account for your child is if they are likely to earn more than £100 per year in interest from the money you or their other parent/stepparent gives them. While Junior ISA savings remain tax-free year after year, the same doesn’t apply to non-junior ISA savings accounts. So, if your child earns more than £100 per year interest from the money you (their parent) give them, it would be taxed at your tax rate. It would only remain tax-free if your child’s savings don’t take you over your personal savings allowance.
If your child is likely to exceed the £100 limit (per parent) and you’ll exceed your personal savings allowance, it is better to save the cash in a Junior ISA so it remains tax-free.
A final reason you might choose a Junior ISA over a children’s savings account is if it offers a higher interest rate. It’s worth comparing interest rates for Junior ISAs and savings accounts to see what’s best.
But remember that interest rates change, and you might find that savings accounts increase later. Unfortunately, if your money is locked in a Junior ISA, you won’t be able to withdraw it and move it elsewhere.
Some parents may feel opening a JISA and a child savings account is beneficial. While a JISA ticks the box for long-term saving, a child saving account might help teach children to save and manage money effectively, with the notion that by the time they turn 18, they will have better financial knowledge and experience to manage the money they receive from their JISA.
Can I transfer a Child Trust Fund (CTF) to a Junior ISA?
Children born between 1st September 2002 and 2nd January 2011 will have previously had a Child Trust Fund (tax-free savings account) automatically opened by the Government containing at least £250. Like with Junior ISAs, the money in a CTF is only accessible to the child when they reach 18.
If your child has a CTF and they are under 18, you can convert it to a Junior ISA and benefit from better rates. If they are age 16 or over they can do this themself. If they are 18 or over and haven’t touched their CTF, it will change to an adult ISA. They can keep their money there, move it to a different savings account or spend it.
Not sure how to find your (or your child’s) Child Trust Fund? Ask HMRC to find it for you.
Can anyone put money into a Junior ISA?
While only a parent or legal guardian with Parental Responsibility can open a Junior ISA for their child, anyone can make a subscription up to the annual limit (currently £9,000), such as parents, stepparents, grandparents, friends and other relatives.
Do I have to put money into my child’s Junior ISA?
There is no obligation to use your child’s JISA allowance, but you won’t be able to transfer it to the next tax year. Instead, you will receive a new allowance for each tax year. Your child’s Junior ISA will stay open whether you use it or not, so you don’t need to pay a minimum amount to keep it active.
Saving for the future
We hope this article has helped you to decide if opening a Junior ISA is the best way to save for your child’s future.
For information on the best Junior ISAs, we recommend you visit the Money Saving Expert website and seek personal guidance on saving and investing from a qualified Financial Advisor.
