We all want to do what’s best for our kids. But putting something aside each month to give your little angels a financial head start in life isn’t always easy, especially when there’s always a new pair of shoes, school bag or coat to buy for someone. If you’re in a position where you can save for your child’s future, a Junior ISA could help. Here’s how it works.
It allows you to save tax-efficiently
Junior ISAs are a great way to boost your child’s financial future since they allow you to save and invest for them, tax-efficiently. What does this mean? Put simply, a Junior ISA can help to keep the Government’s hands off money you want to set aside for your child. When you pay into a Junior ISA, your child will not pay any tax on income they earn or returns they make, and your little angel would keep everything after fees and charges are taken. Junior ISAs were introduced in 2011 by the government to replace Child Trust Funds.
There are different types
There are two types of Junior ISA:
A Junior Cash ISA is essentially the same as a bank or building society savings account, but your child will not pay tax on any interest they earn on their savings. With a traditional savings account, your child would pay Income Tax on earnings above £1,000. With a Junior Cash ISA, your child earns a rate of interest, however, if this rate doesn’t exceed inflation, their savings will lose value in real terms. Also, there are restrictions on who can withdraw money from a Junior Cash ISA and when this can be withdrawn.
A Junior Stocks and Shares ISA is about investing your child’s money in shares and bonds without paying tax on any capital gains or dividends they receive from their investments. With investing there’s always a chance you could get back less than you put in, but it also means you could potentially get higher returns than cash savings over the long-term. A study conducted by Barclays1 has shown that historically, shares have performed better than cash 90% of the time when investing over a-10-year period.
1. Barclays Equity-Gilt Study: Source Telegraph: https://www.telegraph.co.uk/finance/personalfinance/investing/11477122/Historys-lesson-for-Isa-investors-Barclays-Equity-Gilt-Study-2015.html
It comes with an annual allowance
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, into which you can put up to a maximum £4,260 this tax year – this is your child’s annual allowance. In 2019/20, your child’s allowance will be £4,368. You can choose to put everything in one ISA or split the amount between the two types however you like. You have until midnight on the 5th April to use the annual allowance or you’ll lose it forever. On the 6th April, another cycle starts, and your child gets a new Junior ISA allowance.
It’s owned by your child
One of the most important benefits of a Junior ISA is that the money belongs to the child, so neither you nor anyone else can access it, ever. This is really useful if you’re one of the UK parents who admit to dipping into their kid’s cash savings. The money is locked away until your child’s 18th birthday, when they gain control of their money and it becomes an adult ISA. At that point it’s up to them whether to keep saving and investing for their future.
Although your child can only ever have one Junior Cash ISA and one Junior Stocks and Shares ISA, you can transfer their Junior ISA to another provider if you’re unhappy with the service or returns they’re getting or the fees you’re paying. The amount you’re allowed to transfer will vary depending on the type of Junior ISA and the nature of the transfer:
- If you want to transfer between two Junior Cash ISAs or two Junior Stocks and Shares ISAs, you must transfer the full balance.
- If you want to transfer from a Junior Cash ISA to a Junior Stocks and Shares ISA or vice versa, you can transfer the balance in part or in full, since your child can hold one of each type of ISA at the same time.
If your child holds a Child Trust Fund, you can transfer it into either type of Junior ISA easily, using the official transfer form. However, you must transfer the full balance as you cannot hold both a Junior ISA and Child Trust Fund at the same time. Upon completion of the transfer, the Trust Fund will be closed.
Figures are based on past performance and past performance is not a reliable indicator of future results.
The tax treatment depends on your individual circumstances and maybe 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.
Investing is for everyone.
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.