If you want to give your child a head-start in life, paying into a Junior ISA (JISA) could help. A Junior ISA lets you save or invest for your child without paying UK tax on any profits they make. There are two types of Junior ISAs: Junior Cash ISAs and Junior Stocks and Shares ISAs. The former lets you save for your child, and the latter allows you to invest their money. Unlike an adult ISA, where you can open a new one every tax year, your child can have just one Junior Cash ISA and one Junior Stocks and Shares ISA account throughout their childhood.
Junior ISAs could be a great way to build a nest egg for your child, but they come with many rules. For instance, the amount you can put in a Junior ISA is limited, currently you can save or invest up to £9,000 – this is the Junior ISA allowance for 2020/21 and it could potentially change in the future. The way you use it is completely up to you. You can either put everything in one Junior ISA, or split it up between a Junior Cash ISA and a Junior Stocks and Shares ISA. Either way, you have until midnight on the 5th of April each year to use it. What’s more, everything you put in a Junior ISA is locked away and nobody can dip into your child’s savings, not even you. And once your child turns 18, they’ll gain full control over their pot and will be able to decide what to do with their money. Many parents worry about their child using their money irresponsibly refuse to tell their little one about their pot. But is that a good thing? Should you keep your kid’s account secret? Well, here are some things to consider.
Should you tell your child about their Junior ISA?
It’s completely up to you and we can’t really help here. But all we can say is that realistically, you’ll have to tell your child about their Junior ISA at some point. You can’t keep it secret forever – after all, it’s their money, and legally, they’re entitled to it. Now, we’re not judging, and we understand that there are many good reasons to remain quiet about it. According to a study, 34% of parents say they don’t trust their child to use their money responsibly – and that’s fair enough1. If you tell a 10-year kid they’ve got £7,000 in a savings account, they will get excited and may want to use it to buy sweets, video games, or clothes. At this age, it’s hard to think long-term, and the idea of owning a home, or going to university may not be very appealing yet. So, we get it, it’s not easy to tell them and perhaps, before the big reveal, it could be worth discussing financial goals with them and explaining the difference between short-term and long-term. But again, it’s all up to you!
Benefits of telling your child about their Junior ISA
Telling your child about their Junior ISA comes with many benefits. It can often be an opportunity to introduce them to the world of saving and investing. Funnily enough, kids aren’t taught about money management at school and most of the time, they’ll learn through their parents. So, you’ve got to set the right example and show them how it’s done. A Junior ISA can help you start the conversation! If you tell them about their pot, you’ll probably have to talk about the importance of saving and investing. You’ll also have the possibility to show them how their money is performing. And you’ll be able to talk about what happens after their 18th birthday – it’ll give you a chance to help them think about their future projects. Obviously, you can’t tell them what to do with the money, but you can guide them and encourage them to fund long-term goals and keep up with the good savings habits.
When is a good age to tell your child about their Junior ISA?
About 80% of UK parents wait until their child is 16 to tell them about their Junior ISA, but is it not a bit late to reveal the secret?2 Well, there’s no perfect age to tell your child about their pot, however as a rule of thumb, the sooner you tell them, the sooner they can understand the notions of saving and investing and the more time they’ll have to plan for their future. If you want your kid to make the right decisions for their future, it could pay off to start the conversation as soon as they’re able to understand the concept of money. Young kids are like sponges, they soak in information very quickly and easily. So, telling your child about their Junior ISA at a young age, and keeping them updated with how their money is performing, could do wonders for their financial future. Alternatively, if you decide to tell them when they’re 16, they may be less receptive to your money lessons, and you’ll have less time to ensure they’re being responsible with their money.
Putting money aside for your child could be a great thing to do, but it’s also important to give them the financial knowledge and tools that will allow them to take over and build the future they’ve always envisioned. So, no matter when you tell them about their Junior ISA, make sure you talk about money with them and teach them some valuable lessons about saving and investing.
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.