Saving for your little ones from an early age is a great idea, but with so many different ways to do it, things can quickly become confusing or seem complicated.
One saving option which is available to you is Junior ISAs. This is a tax-efficient savings plan that’s designed for children who are under 18. However, legally they can only be opened by the parents or guardians of the child, so they aren’t be available to everyone.
To make your decision on saving for your children easier, we’ve laid out the pros and cons of Junior ISAs below:
Pro – Junior ISAs, are tax efficient
With a Junior ISA, you can save a set amount without being taxed on the interest or gains. For 2020/21 this limit was set at £9,000, but this amount is decided by the government each tax year and is subject to change.
This is especially important, as children are taxed like adults, which is where it can get confusing. If a child has no income, they won’t be taxed. However, if the money saved for them generates more than £100 interest a year it will be taxed at the parent’s tax rate for all the interest – not just the bit that’s over the £100.
A Junior ISA protects against this, as all interest and gains are tax-free.
Con – low limit on tax-free allowance
While the income may be tax-free, there is a limit on how much you can put into a Junior ISA each year. This tax-free allowance varies from year to year, so you’ll need to check annually to see how much you can contribute. The Junior ISA allowance is significantly less than adult ISAs, so it’s important to keep track of how much you contribute so that you don’t go over this limit.
It’s also good to know that if you don’t use all of your child ISA allowance, then it’ll go, and it can’t be carried forward.
Pro – all gains are tax-free
The potential gains of your child are tax-free, meaning they get to keep more of their returns. And since their gains can compound (when profits that have been reinvested start generating further profits), their Junior ISA could grow a bit faster.
Pro – there are different types of Junior ISA
There are two types of Junior ISA available – cash and stocks and shares. You can open both and split your annual allowance between the two, or just open the one. How you choose to use your allowance is entirely up to you, but it’s worth knowing that once you open it’ll remain open until your little one turns 18.
What’s the difference between the two types of Junior ISA? Well, in short, cash provides an interest rate which is typically higher than a normal savings account due to the length of the term, while a Junior Stocks and Shares ISA could allow your child to benefit from the potential of investments.
As with all investments, your capital is at risk, but you benefit from taking a long-term approach which could help to iron out any poor market performance. While a Junior Cash ISA may appear to be the ‘safer’ option, most offer variable interest rates, which aren’t likely to stay at the same level for the duration of the account.
Pro – the money belongs to the child
All the money and any returns on the investments in a Junior ISA belongs to the child, with them being able to access it on their 18th birthday. This makes it a great solution for long-term saving and could give them a strong financial start to adulthood with, potentially, a substantial amount of money to help with buying a house, a car or putting them through higher education.
Con – the money belongs to the child
On their 18th birthday, your child will be able to do whatever they want with their money and, let’s face it, that’s quite scary. There is always the potential that your child could take out all their money and spend it on something you don’t approve of, which is true of any money you give to them. We accept no liability if they come home with a giant back tattoo, paid for by the funds that were in their Junior ISA.
As long as you’ve talked to your child about finances, making smart decisions and guided them on what the money is for, then this shouldn’t be a classed as a negative.
Pro – the money is locked in
A Junior ISA is a long term, tax-free saving option which can be opened on the day your child is born and won’t be able to be accessed until their 18th birthday. This stops anyone from dipping into this savings pot and reducing the amount available to the child, but another positive of having the money locked in is that, with Junior Stocks and Shares ISAs, all gains made on their Plan are reinvested. This means that there could be a larger sum to invest and your child’s money could grow at a much faster rate than if the gains were paid out.
Con – the money is locked in
It was touched on above, but the money in a Junior ISA can’t be touched until the child turns 18. When you put money into a Junior ISA, it is no longer yours, it is your child’s, and you will not be able to take it out again.
It’s also good to be aware that you can transfer any type of Junior ISA to any other Junior ISA, but you will not be able to withdraw the money to put into other savings options.
Pro – long-term investing
We always try to stress the importance of a long-term view when investing and a Junior ISA enforces this. If we were going to do a ‘what if’ example, imagine if you maxed out your child’s ISA allowance each year from when they were born till they reached 18 (and the allowance stayed at £9,000) – you’d have put £162,000 away for them. After 18 years, this could be as much as £224,508 if you invested with our Confident Plan1.
Pro – getting started is easy
If you’ve decided that a Junior ISA is the right option, and you’d like to benefit from the potential that investing in stocks and shares can give you, then the good news is that setting up a Junior ISA with Wealthify is dead simple.
In fact, our sign-up process can be done in just a few minutes and the biggest decision you’ll need to make is how much risk you’re comfortable with when choosing an investment style. We also have the option of Ethical Plans, so that you can invest in the future of the planet as well as the future of your child.
1: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £174,797. If markets perform better, your return could be £285,892. Values correct as of 23/01/2020.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Past performance is not a reliable indicator of future results.
Please remember the value of your investments can go down as well as up, and you could get back less than invested. Past performance not an indicator of future value.