How to save for the kids with a Junior ISA
If you want to save for your children's future, sometimes an old-fashioned piggy bank just won't cut it. One popular option for families wanting to save or invest money on behalf of the kids is the Junior ISA (JISA). This tax-free savings account can help you to save cash or invest in the stock market for your child to inherit when they turn 18. But how do they work and are they any good?
Key facts about Junior ISAs
Who can open a Junior ISA?
The money in a JISA is locked away until the young person's 18th birthday, but here's the catch: once they turn 16, they can start making decisions about their money, meaning they can go in and change the underlying investments if they so wish. Then at 18, they gain full control of the account and can do whatever they wish with it - withdraw all their funds in one go, for example! The good news is that in reality, data suggests this doesn't really happen and most Junior ISAs roll over to adult ISA accounts, and the savings habit continues. It's also worth bearing in mind that Junior ISAs are not flexible accounts, meaning that you can't easily withdraw funds from them unless under very strict circumstances such as terminal illness or the closure of the account.
How do Junior ISAs work?
Which you go for is up to you, but there's two key factors to consider when deciding: How comfortable are you with stock market risk and how long until your child turns 18? The younger the child, the more it makes sense to consider the Stocks & Shares variety. This is because over long periods of time they will be more likely to ride out any volatility in the stock market and see their investments increase in value (though of course this is not at all guaranteed). Keeping their future savings in cash, on the other hand, may feel like the safer option but leaves it exposed to inflation, which over time can erode its purchasing power - meaning the money you tuck away for them today could be worth less in the future. Or your child can have one of each (a Cash JISA and a Stocks & Shares JISA) so long as the total amount does not exceed the annual allowance - more on this below.
How much can you put in a Junior ISA?
You can put a maximum of £9,000 into Junior ISAs every tax year and this money is completely shielded from tax. This means that any interest you earn on a Cash JISA, or any investment gains or dividends you earn in a Stocks & Shares JISA, will not be liable for Income Tax (which can be as high as 45%), Capital Gains Tax (as high as 20%) or Dividend Tax (up to 39.35%). This could save you thousands of pounds in tax every single year and means your child is really getting every penny you put in for them. Your £9,000 annual allowance can also be split across multiple Junior ISAs, so you could - for example - put £5,000 in a Cash JISA and the remaining £4,000 in a Stocks & Shares JISA.
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