Introduced in 2011, Junior ISAs could be a great way to put money away for your child and help build their financial future. But this may be the first time you're hearing about them.
If you’re not familiar with how Junior ISAs work or just want more info before opening an account for your child, here’s a quick guide to explain the basics.
What is a Junior ISA?
A Junior ISA is a type of account that lets you save or invest for your child in a tax-efficient way. There are two types of Junior ISAs: Junior Cash ISAs and Junior Stocks and Shares ISAs.
A Junior Cash ISA is similar to a bank or building society savings account. You put money aside and your child is guaranteed to get everything back, plus a bit of interest. But unlike a traditional savings account where your child would pay tax on earnings above £1,000, with a Junior Cash ISA, all interest payments are tax-free.
A Junior Stocks and Shares ISA, on the other hand, will give your child the opportunity to invest tax-efficiently. This means that the money you put in for them is used to buy investments, such as shares, bonds, and property, and there’s no tax to pay on any returns they might may.
You can either open a Junior Cash ISA, a Junior Stocks and Shares ISA, or one of both – the choice is up to you. But do note that your child can only have one of each type.
Which type of Junior ISA should I choose?
Before making any decisions, it’s important to understand the pros and cons of both saving and investing because they are quite different.
With a Junior Cash ISA, there’s no risk of losing money as at the end of their savings journey as they will get back everything you put in, plus a bit extra. However, you may want to consider the impact of low interest rates and inflation (the increase in prices over time) on their money.
If the interest rate your child gets from the bank falls below the rate of inflation, then the value of their savings will decrease. This doesn’t mean they'll lose money, but in a number of years, their savings may not be worth as much as they used to due the prices of goods and services increasing.
Now, with investing, there’s an element of risk involved as your child could lose some money. However, since there’s no fixed interest rate, there’s also a chance for inflation-beating returns.
In fact, a number of studies have shown that, over the long-term, investing in the stock market tends to beat cash. Between 1983 and 2020, the average inflation rate (RPI) in the UK was 3.4%1 and for the same period, the FTSE 100, one of the UK main stock markets, gave investors a return of about 6.2%2 a year (with re-invested dividends).
However, please note that these historical performances are not reliable indicators of future results.
Who can open a Junior ISA?
Junior ISAs can only be opened by a parent or a legal guardian.
And one thing to note is that everything put in a Junior ISA belongs to your child and is locked away until their 18th birthday, meaning nobody, not even you, can dip into their pot and slow down the potential growth of their money.
Once they turn 18, your child’s ISA will automatically become an adult ISA and they will gain full control over their account. In other words, they’ll be able to decide what to do with their money and it’s up to them whether to keep saving and investing for their future.
How much can I contribute to a Junior ISA?
The amount you can put in a Junior ISA is limited. As things currently stand, you can save or invest up to £9,000 per tax year (although this may be subject to change in future).
This is your child’s ISA allowance and the way you use it is up to you. You can either put it all in one Junior ISA, or split it up between a Junior Cash ISA and a Junior Stocks and Shares ISA. Every year, you have until midnight on the 5th April to use the Junior ISA allowance, so it could be a good idea to try and make the most of it.
Obviously, not everybody can afford to put £9,000 aside and that’s absolutely fine if you can’t use the full Junior ISA allowance. The key to building up a decent nest egg for your child could be to start putting money away, little and often, when they’re still young.
Why, you ask? Simply, because saving and investing isn’t just about how much you put away, it’s also about how long you do it for. You may think now is not the right time to pay into a Junior ISA because you can’t save much, but the earlier you get the ball rolling, the more time your child’s money might have to potentially grow and benefit from the power of 'compounding'.
Put very simply, compounding happens when your child’s profits start generating their own profits (provided these are put back into their account). Over time, these gains can really add up and help boost your child’s savings.
The good thing about compounding is that you don’t need to pay in large lump sums to witness its magic. It’s possible to take advantage of compounding by saving or investing small sums regularly.
Say you open a Junior Stocks and Shares ISA on your child’s fifth birthday and decide to put away £150 a month. 13 years later, they could end up with £29,2523. Now, let’s imagine you started investing on the day they were born instead. With five extra years of contributions and potential growth, your child could celebrate their 18th birthday with £44,720 – that’s an extra £15,4684.
Can I pay into a Child Trust Fund and a Junior ISA?
No, you cannot hold a Child Trust Fund and a Junior ISA at the same time – it’s one or the other.
Child Trust Funds (CTFs) were launched in 2005 and made available to all children born between 1st September 2002 and 1st January 2011. They were designed to encourage parents to save for their children in a tax-efficient way.
They were replaced by Junior ISAs in January 2011, meaning you can no longer open a new one. However, if you already hold a CTF, you’re can still make contributions, up to £9,000 per tax year (subject to change in future), until your child turns 18.
Children with a CTF used to receive £250 from the government on their seventh birthday, but HMRC stopped distributing the bonus after August 2010.
CTFs are quite similar to Junior ISAs as no money can be withdrawn from the account until your child is 18. On their 18th birthday, they’ll be able to either cash the money or move the money to an ISA, or a mix of both – it’s all up to them.
If you’re disappointed with the service you’re getting from your provider, you can transfer your CTF somewhere else, as long as they accept this type of account – not all providers will, so make sure you check before moving your child’s money around.
Another thing you could do is transfer your CTF to a Junior ISA. But before you start any transfer, you may want to research the interest rates on offer or have a look at the fees and investment strategy, if you decide to invest.
Once you’ve found a Junior ISA provider you like, the transfer process can begin. You simply need to tell your new provider that you want to move your CTF, and to ensure the transfer is successful, you must move the full balance from your CTF and complete the official transfer form – do not withdraw anything, otherwise your child’s savings will lose their tax-efficient status.
Upon completion, your CTF will be closed and your child’s money will sit in a brand-new Junior ISA.
If you’ve got a CTF but can’t remember where it is, don’t worry, it’s very easy to get hold of it. All you need to do is complete a quick online form on the HMRC website: https://www.gov.uk/child-trust-funds/find-a-child-trust-fund. Then, within about three weeks, you’ll receive a letter from HRMC telling you who your CTF provider is.
Can I transfer an existing Junior ISA?
Yes, if you already have a Junior ISA, it’s possible to transfer it to another provider.
There are many reasons why you might consider moving your child’s money to a new place. Say, you’ve found better interest rates elsewhere, or you think you’re paying too much in fees, then it could be wise to transfer your child’s account but remember to do your research.
Also, it’s important to understand the different rules about Junior ISA Transfers.
To transfer your child’s ISA, you must be the registered contact for the account, in other words, only a parent or legal guardian can action a transfer.
If you’re transferring between the same type of Junior ISA, you must transfer the full balance – this is because your child can only have one Junior Cash ISA and a Junior Stocks and Shares ISA throughout their childhood. If you’re transferring a Junior Cash ISA to a Junior Stocks and Shares ISA, or vice versa, you can choose how much to transfer.
For every transfer you make, remember that you must complete the official Junior ISA transfer form to keep the tax benefits of your child’s ISA. This form should be given to you by your new provider, if not, make sure to ask for it.
Before you transfer anything, it’s also important to check whether there’s any entry or exit fee. When you’re all happy, the process can begin.
If you want to transfer your child’s account to a Junior Stocks and Shares ISA, it may be worth checking out robo-investing platforms. At Wealthify, we take care of the transfer process for you and once your child’s Junior ISA is all set up, we’ll manage it on their behalf, making sure their money works as hard as it can.
References:
1: Data from ONS
2: Data from Bloomberg
3: This is the projected value for a Confident Plan (Medium Risk Plan) with an Original theme. This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £23,603. If markets perform better, your return could be £35,863. Values correct as of 19/05/2023
4: This is the projected value for a Confident Plan (Medium Risk Plan) with an Original theme. This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £34,982. If markets perform better, your return could be £57,390. Values correct as of 19/05/2023
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
