ISA or Pension: A Comprehensive Guide
Saving for retirement is a critical aspect of financial planning, helping ensure a secure and com...
You’re never too young to get into the savings habit. In fact, the earlier you start putting money away, the better chance you have of building stable financial foundations.
That’s where Junior Individual Savings Accounts have a fantastic role to play. They are tax-efficient wrappers that enable you to save and/or invest on behalf of a child.
They are opened by parents or guardians in the child’s name, while contributions can be made by anyone – parents, grandparents or even family friends.
As the money invested can’t be accessed until the child’s 18th birthday, it makes a Junior ISAs the perfect longer-term present that can help transform their lives.
Junior ISAs were introduced back in November 2011 as long-term, tax-free savings vehicles for children under the age of 18.
They replaced Child Trust Funds that ran from September 2002. While they are obviously no longer available, contributions can still be made into existing CTFs.
Around one million Junior ISA accounts were subscribed to in the tax year 2019-2020, according to the Office for National Statistics. This is up from the 954,000 in 2018-2019.
The data also showed £971m was subscribed to Junior ISA accounts in 2019 to 2020, around 61% of which was in cash. Average subscriptions were around £5,740, a 5% decrease on the previous year.
A Junior ISA is available to any child that’s a UK resident – and, obviously, under 18-years-old.
They can’t have a Junior ISA and Child Trust Fund (CTF). If they want a Junior ISAs then the Child Trust Fund can be transferred into it.
There are two types of Junior ISA: a cash Junior ISA and a stocks and shares Junior ISA. Both work in different ways – along the lines of adult ISAs – and offer tax benefits.
In a cash Junior ISA, there won’t be any tax to pay on interest generated. In a stocks and shares Junior ISA, holders won’t have to pay tax on any capital growth or dividends received.
A child can have one or both types of Junior ISA.
The current annual maximum that can be invested into a Junior ISA during a tax year is £9,000*. This tax year runs from 6th April to the following 5th April.
There are no limits as to how this money can be invested. You can contribute an annual lump sum, make regular monthly deposits, or opt for ad hoc payments. However, the total saved/invested must not exceed the £9,000 limit. Therefore, if £3,000 has been paid into a cash Junior ISA, only a maximum of £6,000 can be put into a stocks and shares Junior ISA in the same tax year.
Only parents or a guardian with parental responsibility are allowed to open a Junior ISA for under 16s. Those aged 16 or 17-years-old can open their own Junior ISA as well as an adult cash ISA.
There are three steps to follow in opening a JISA:
These require the least amount of research. Cash Junior ISAs can be opened with most major banks and building societies. The key determining factor will be the interest rate on offer.
It’s essential to shop around for the best possible rates. Remember, this is a very competitive marketplace so there will be plenty of options.
Pay particular attention to any temporary interest rate bonuses that are on offer and try to compare like-with-like before making your decision.
It can make sense to have money allocated into a cash Junior ISA as interest generated by the account won’t be subject to taxation.
This could be particularly beneficial when you’re looking over the longer-term. If you put away the maximum allowed each year, a sizable nest egg will soon be achieved.
Of course, you also need to consider the interest rate being earned. If you’re looking to grow the pot more quickly, then a stocks and shares Junior ISA may be more appropriate.
If you are looking to invest for the longer-term then a stocks and shares Junior ISA can potentially be a good move.
As the money may be invested for the best part of two decades, this should be enough time to smooth out stock market volatility.
It’s also hoped that making wise investment decisions over this period could result in a substantial pot by the time the child turns 18-years-old.
There are a number of ways to open a stocks and shares Junior ISA. For example, they can be purchased through a fund supermarket platform, a broker, a financial adviser or directly from a fund provider. Some are also available at major banks. Once again, it’s important to spend some time looking at your various options.
So, what investments should be chosen? This will be down to personal preference.
Ask yourself these questions: How much risk do you want to take with the portfolio?
Are you looking to generate a certain level of returns for the Junior ISA? Do you want exposure to particular asset classes?
There’s certainly no shortage of investment options – and that’s where FundCalibre can help you research and choose the most suitable investments.
Of course, this all depends on what type of Junior ISA you’ve chosen. For a cash Junior ISA, it will be down to the interest rates. If it’s a stocks and shares Junior ISA, this will also depend on how investments have performed.
For example:
£50 a month saved into a cash account with an interest rate of 2.5% over 18 years would give your child £13,650 on their 18th birthday**
£50 a month invested with an average rate of return of 6% over 18 years would give your child £19,465 on their 18th birthday***.
Note that the total annual limit is £9,000* across both cash and stocks and shares accounts (not £9,000 for each account).
There are a number or rules governing Junior ISAs that you’ll need to bear in mind. For example, you can transfer money between your child’s Junior ISAs. You can also transfer between an existing Child Trust Fund account and a Junior ISA. However, you can’t transfer money between a Junior ISA and an adult ISA.
It’s also possible to change the funds or other assets in which you are invested or switch from cash to stocks and shares and back again.
Once the child turns 18-years-old, their Junior ISA automatically turns into an adult ISA. They can also take out the money when they reach this age.
Money saved/invested in a Junior ISA belongs to the named child and generally can’t be taken out of the account until they reach 18-years-old.
However, there are some exceptions. The parent or guardian responsible for opening the account is known as the registered contact. This person will be able to take the money out early if the child is terminally ill and not expected to live more than six months. The contact would need to complete a terminal illness early access form in order to let HM Revenue & Customs (HMRC) know what is happening.
Also, if a child dies, then any money in their Junior ISA will be paid to whoever inherits their estate. This is usually one of the child’s parents but will depend on the individual circumstances. While you don’t need to contact HMRC, you will have to speak with your account provider. They may require a copy of the death certificate.
This article was originally published 26 July 2017 and updated on 8 June 2022.
*current limit for the tax year 2022-2023
**Source: The Calculator Site, £50/month for 18 years at 2.5% interest, calculated monthly
***Source: The Calculator Site, £50/month for 18 years at 6% interest, calculated monthly
The current annual limit to invest into a Junior ISA is £9,000*. You can contribute an annual lump sum; regular, monthly savings; or ad hoc payments.
Contributions can either be made into a cash account or a stocks and shares account, where they would be invested into assets like funds, individual stocks and bonds. Because of the potential long-term nature of the Junior ISA (up to 18 years), investing could be an excellent way to significantly boost your returns, as the two examples below show:
Note that the total annual limit is £9,000* across both cash and stocks and shares accounts (not £9,000* for each account).
To get a better idea of the possible value of a portfolio with different monthly contributions, take a look at the chart below³.
Cash Junior ISAs can be opened via most major banks or building societies. Be sure to shop around for a good rate and be aware of any temporary interest bonuses.
Stocks and shares Junior ISAs can be purchased through a funds supermarket platform, a broker, an advisor or direct from a fund provider. Some are also available at major banks.
You’re not locked in to your existing Junior ISA provider. For example, if you have a cash savings account and you find a provider with a better rate, you can move the money. You can also change the funds or other assets in which you are invested or change from cash to stocks and shares and back again.
You can invest in a Junior ISA online, by phone and by post. Charges and options may vary.
Choosing a Junior ISA cash account can be fairly simple. The main considerations are the interest rate paid and the length of time the interest rate is valid.
Choosing investments for your Junior ISA stocks and shares account can be tougher, but getting it right (or wrong!) can have a huge impact on the value of your investment.
FundCalibre is designed to help you research and choose investments to suit your needs, with Elite Funds in UK, European, US, Search Elite Rated Asian equity funds, Japanese, global and emerging market equities, as well as fixed interest and many other categories.
¹Source: The Calculator Site, £50/month for 18 years at 2.5% interest, calculated monthly
²Source: The Calculator Site, £50/month for 18 years at 6% interest, calculated monthly
³Source: The Calculator Site, all contributions and interest rates, calculated monthly
*Maximum allowance for the tax year 2020-2021.