In a nutshell
• Save up to £9,000 a year per child
• Both cash and shares varieties
• Grandparents can pay in too!
• No withdrawals until the rugrats are 18
What is a Junior ISA?
A Junior ISA (also called a JISA) is a tax-free savings accounts which allows you to build up a nest egg for the kids. You can open a cash one, or a stocks & shares one, and anyone can pay into this until your child’s 18th birthday. Though if you're saving for at least 10 years (i.e. if Junior is 8 or under) then sitting in cash for this long and not harnessing your lot to the world's leading companies is a bit pointless.
Is a Junior ISA right for me?
Under 18s can save up to £9,000 per year into a Junior ISA, but if you have other financial priorities, they may not be the right move for you.
If you can spare £25-£50 a month, or have a lump sum of about £500, you can usually set up a JISA. Your children will benefit from a saving pot which could do nicely in the stock market, ticking away in the background for 18 years.
These make sense for higher-income parents looking to keep as much away from the taxman as possible. You can use your adult ISA allowance of £20,000 x 2 AND the Junior ISA allowance of £9,000 per child. That's a big annual stash to shield from the tax man.
Over the long-term, shares will typically do better than cash. If your child is under 10, you really should be at least considering the stock market for these long-term savings.
The chart below shows what a £50 per month contribution could look like after 18 years if you were to start when your child is born and regularly save £50 per month until they were 18.
Great alternative to plastic tat at Christmas and birthdays
Get the kids involved by teaching them about the stock market
Give them a headstart with uni fees or driving lessons when they turn 18
Can start with as little as £25 a month
Use a pre-packaged option to remove the anxiety of you choosing the investments
Tax and child savings
When you save into a Junior ISA, any growth or income in the underlying investments is basically tax-free.
With normal investments outside the protective ISA box, any income of over £100 a year from money you give to the kids is taxed at the parents’ marginal rate (to stop parents dodging tax by giving money to their children). This doesn’t happen with ISAs, so you can build up savings without incurring a tax bill.
So, if you give your children money and it makes more than £100 a year before tax in interest (or £200 if both parents give money), ALL of this income will be taxed as if it were your own -unless it is shielded in an ISA.
Now that’s if it comes from you. If your kids are budding entrepreneurs and have a business selling conkers/photos/cakes, then they have a personal income tax allowance of £12,500 a year before paying tax. Just remind them who gave them those creative genes when it’s Christmas time!
There are a few allowances which cumulatively mean kids and adults won’t pay any tax on savings if their total taxable income is less than £18,500. If we think of them sitting on top of each other - first there is the personal allowance which is £12,500; then we have the £5,000 starting savings rate at 0%; and finally the personal savings allowance worth up to £1,000.
If you don’t like the idea of locking it away in an ISA until they are 18, then have a look at savings accounts for children from the high street banks. For example, Santander currently pays 3% on balances of between £1,500 and £2,000 on its 1-2-3 Mini Current Account which can be managed online.
If you're going down the cash Junior ISA route, Tesco is currently offering 2.25% on balances over £1, while Halifax is paying 2%. But do shop around. These rates are correct as at February 2022 but they tend to change frequently.
Got an old Child Trust Fund?
Child Trust Funds (CTFs) are savings accounts that were previously available for kids born between 1 September 2002 and 2 January 2011. Parents could use them to deposit free cash vouchers of up to £250 (or up to £500 if they were on a low income) that used to be handed out twice to each child by the government. Now defunct, the question is should you move it to the new kid on the block – the Junior ISA?
There’s no way to say this nicely – this is a bugger’s muddle. Most providers will not accept a transfer of Child Trust Funds into Junior ISAs. So any move can necessitate first moving from a Child Trust Fund to a Junior ISA with your old provider. Which can incur fees. And then move it to a Junior ISA with another provider. Before moving, do contact your current provider and ask them about all exit fees. That’s the first step.
Here is one reader's story:
"After reading an article on your site, I decided to do something about my children's neglected Child Trust Funds, currently with F&C Investments. I decided to move them to a Vanguard JISA. They have about £4k in each at the moment, but moving forwards, we're planning on investing £250 per month into each account (£500 total) for the next 9 years for our eldest and 11 years for our youngest.
I sent an enquiry to F&C and received the email below. As I understand their response (which to me really isn't clear), the only way I can move the money from F&C CTF to Vanguard JISA, is to first move it to a F&C JISA, then out to a Vanguard ISA.
If I do this, they seem to be saying they will charge me:
£100+VAT (2 x transfer out fees from the F&C JISA) - this seems outrageous as there's no transfer out fees from the CTF - they're forcing me to transfer out through this route.
A percentage of their JISA annual management fee, depending on how long it takes them to transfer (I think this is pro-rata - 2 x £50+VAT annual fee).
2 x dealing charge (£12+VAT per account) so £24+VAT as my Stakeholder All-Share tracker fund is not available for investment in their JISA.
But then at the bottom of the email they say: We do not make a charge to transfer CTF accounts to other providers, but we will deduct a pro-rata account charge when we transfer an F&C CTF account. To transfer a Junior ISA investment we apply a £50 plus VAT transfer out fee, and if shares need to be sold we will also deduct a dealing charge of £12 per Trust. We also deduct a pro-rata annual management fee when we close an F&C JISA account."
Unfortunately, the sums of money in the accounts was pretty small and so these fees just were not warranted. So this reader is sort of held hostage in an account she does not want to be in because of high exit charges. A child cannot have both a Child Trust Fund and a Junior ISA.
If you have lost track of where your child’s trust fund is, then you can search on the government’s website but warning – you will need to go through the government gateway malarkey so have a stress ball at the ready!). It’s not as bad as it used to be – we went through the process (have a payslip and your National Insurance number to hand) and it took about 6 minutes.
Cash or shares?
Junior ISAs are just as flexible as a normal ISA. Investors can invest in range of underlying investments, including cash, the stock market, and government bonds. The temptation – because it is for your children and we spend our lives trying to keep them away from risk – is to play it safe and to keep it all in cash.
However, if your kids are 13 or under, which by definition means that you are saving for at least 5 more years, you can afford to take a little more risk with children’s savings because you have time to ride out the highs and lows of markets. Risk doesn’t mean behaving like a gambling idiot – it’s how the industry describes having your money in volatile assets. Shares will of course be a much bumpier ride than cash, but over any 10 year period since stock markets began, they have done better than cash 9 times out of 10. Over 18 years, it’s 9.9 times out of 10.
Our children’s JISAs are in fairly spicy things like emerging market shares – pretty hardcore stuff but we have a very long time frame to play with. The thinking here is that it does not matter if one year markets have a shocker because they will recover at some point and then surge forward. A very crude analogy could be that cash is like being in a car with someone driving at 20 miles an hour. Being in shares is like being with someone who goes from sitting still in traffic to driving along at 70 miles an hour. Sometimes you’ll be stationary or in reverse but if the journey’s long enough you’ll get there quicker.
So ask yourself if your nervousness about markets is preventing your money from working as hard as it should be. 60% of the UK’s Junior ISAs are in cash. We think this is illogical and shows that fear of investing is leading to the equivalent of people not leaving the house in case they get run over – stock market risk is real and important to understand, but we need to look at this in context of the timeframes involved.
If you're uncomfortable about investing, then we suggest you look at the Junior ISA from Vanguard (put one of their 5 LifeStrategy funds in this) for a low-cost, low-decision option. Or Fidelity has some ready-made options. Charles Stanley is another choice. You can see how our readers rate their providers on our Best Buy page.
What happens when my child turns 18?
JISAs can be a great way to give the rugrats a dollop of cash for a house deposit, a car, or to fund their education, etc. However, you need to be aware that you can’t control what they do with it. All the money you put in is locked away until your child’s 18th birthday. At that point, it becomes their money and they are free to do whatever they like with it.
If you’ve got a responsible one, you might be lucky and they’ll use it for their university fees. If you haven’t, maybe don’t tell them it’s there (did we just say that?). On their 18th birthday, the Junior ISA will roll over into a normal adult ISA.
Hargreaves Lansdown is the biggest provider of stocks & shares JISAs in the UK. Their data suggests our kids are pretty sensible – 97% of their JISAs transfer to adult ISAs and see no withdrawals in the first 12 months. And almost a third pay in more. When did kids get so sensible?
An alternative is of course just to use your own ISA allowance to save for the kids and then you keep control of the money. It’s less compartmentalised though, and you lose the effect of showing them the account and getting them involved.