We all want to do what’s best for our kids. But putting some money aside each month to give your little angels a financial head start in life isn’t always easy – especially with rising costs, and there always being a new pair of shoes, school bag or coat to buy for them.
But if you are in a position where you can save for your child’s future and want to start, then a Junior ISA (which were introduced by the government in 2011 to replace Child Trust Funds) could be a good place to start. Here’s how they work.
They allow you to save tax-efficiently
Junior ISAs (also known as JISAs) could be a great way to boost your child’s future finances since they allow you to save and invest for them tax-efficiently.
What does this mean, exactly? Put simply, a Junior ISA (or JISA) can help to keep the Government’s hands off the money you want to set aside for your child (because after all, who likes paying tax?).
This is because when you pay into a Junior ISA, your child won't pay any tax on interest they earn or returns they make from the money, meaning your little one would keep everything after fees and any other charges are taken from the provider.
There are different types to choose from
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 from their savings. With a traditional savings account, they'd pay Income Tax on earnings above £1,000 (if they generate over £100 in interest).1
With a Junior Cash ISA, your child earns a rate of interest. However, if this rate doesn’t exceed the level of inflation, then their savings will lose value in real terms because they money can buy less in future.
With A Junior Stocks and Shares ISA, on the other hand, you'll instead invest your little one's money in assets (like 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. This is because your child's returns won't be tied to fixed interest rates.
As an example, if you were to open a Junior Stocks and Shares ISA on the day your child is born and pay in just £20 a month, they could end up with £5,963 at age 18 (compared to the £4,320 that was paid in)2. Even if you waited a few years and opened it on their 3rd birthday (meaning you'd only pay in £3,600), they could still end up with £4,672.3
They come 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 throughout their childhood. And yes – that means they can have one of each type, so you can save and invest for them at the same time.
With Junior ISAs, can currently pay in a maximum of £9,000 for the current tax year. This is your child’s JISA annual allowance. The Junior ISA allowance for 2019/20 was set at £4,368, but it was changed to £9,000 for 2020/21 and has remained the same since then.
You can choose to put everything in one ISA or split the amount between the two types however you like. Just remember that you have until midnight on the 5th April to use the annual allowance or you’ll lose it forever – you can't carry on of your remaining allowance over to the next tax year.
On the 6th April each year, another cycle starts, and your child gets a new Junior ISA allowance to use.
They're owned by your child, not you
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. And this is really useful if you’re one of the parents who dips into their kid’s cash savings from time to time.
The money in a Junior ISA is locked away until your little one's 18th birthday, which is when they'll gain control of their money and it becomes an adult ISA. At that point it’s up to them whether they carry on saving and investing for their future, or they withdraw the money instead.
They can be transferred to another provider
Although your child can only ever have one Junior Cash ISA and one Junior Stocks and Shares ISA, you are able to transfer it to another provider if you’re unhappy with the service or returns they’re getting, or even the fees you’re paying for it.
If you want to find the best child ISA for your little one, you might want to shop around and compare the different Junior ISA providers on the market. Some providers (like Wealthify) will offer additional benefits, like the ability for your friends and family members to pay in too, so they can help build your child's savings even further.
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.
Keen to start investing for your child's future? With Wealthify's Stocks and Shares ISA, you can pay in as often as you like, starting with as little as £1. And because the money is invested, it could have the potential to grow further. Plus. your friends and family can pay in to boost their savings pot too. Find out more about our Junior ISA.
- https://www.sharesmagazine.co.uk/article/beware-there-is-a-sneaky-tax-rule-that-eats-into-your-childs-savings
- 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 £4,664. If markets perform better, your return could be £7,652. Values correct as of 22/05/2023.
- 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 £3,766. If markets perform better, your return could be £5,837. Values correct as of 22/05/2023.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
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 may be subject to change in the future.
Wealthify does not provide financial advice. Seek financial advice if you are unsure about investing.
