It’s never too early to start planning for the future. Saving for your child can make those important milestones, such as a car, a wedding, or a deposit on a first home, much more achievable. It can also help to build good savings habits, particularly if you involve your child in the process.
Junior ISAs are now the default option when it comes to saving for children. They have largely replaced Child Trust Funds, and can allow you to build up a substantial pot by the time your child reaches 18.
This guide explains the main features of a Junior ISA so that you can decide if they are the best option for you.
How do Junior ISAs Work?
A Junior ISA (JISA) works in a similar way to an adult ISA. You can make regular contributions which benefit from interest or investment growth.
If your child has an existing Child Trust Fund, this can be transferred into a JISA.
At age 18, your child will have full control of the money and can roll it over into an adult ISA if they wish.
How Much Can You Contribute?
You can contribute up to £9,000 per year to a JISA for each child. Similar to the adult ISA allowance, if you don’t use it every year, the opportunity is lost.
Parents, grandparents, and anyone else who wishes to can contribute to a child’s JISA. Contributions are managed by the registered contact, usually one of the child’s parents.
16 and 17 year olds can also set up a Cash ISA. This means that they have the full adult ISA allowance of £20,000 available, as well as their Junior ISA allowance.
What About Tax?
All interest, dividends, and capital gains built up within a JISA are free of tax.
No tax or penalties apply for taking money out, although this is subject to restrictions, which are explained below.
JISA contributions are considered gifts for the purposes of Inheritance Tax. The first £3,000 of any gift in a given tax year is immediately outside your estate. You may also be able to make a higher level of regular contributions, providing this is affordable from surplus income. Any gifts exceeding your available allowances and exemptions will remain in your estate for seven years.
Can You Take Money Out?
Generally, it is not possible to take money out of a JISA until the child reaches age 18. There are of course exceptions to this, for example if the child dies or becomes terminally ill.
At 18, the child can withdraw their money without restriction.
What Are the Investment Options?
In the same way as an adult ISA, Junior ISAs offer a number of investment options.
A Cash JISA is one potential option, as this will pay regular interest without any capital risk to the money. However, given current low interest rates, it is unlikely that the JISA will hold its value when inflation is taken into account. Cash is the best option for money that will be required within the next few years. As JISAs are typically a longer term investment, it makes sense to aim for higher returns.
JISAs can invest in any permissible asset available in the market, such as funds, shares, bonds, and investment trusts. The options will depend on the provider selected.
Our tips for investing your child’s JISA are:
- Aim to invest in a wide range of assets, as diversification can help to boost returns without concentrating too much risk in one area. This is not as complicated as it sounds. Multi-asset funds include a wide variety of different investments which are managed behind the scenes.
- Take an appropriate amount of risk. Generally, the longer the timeframe, the more risk you can afford to take.
- Invest for the long-term. Avoid trying to time the market, and don’t be tempted to take money out when the market takes a downturn.
- As your child gets older, involve them in the investment decisions. Financial education in the UK is limited, so an early introduction to the basic principles can give your child an advantage.
Main Reasons to Choose a Junior ISA
The main benefits of a Junior ISA are:
- Tax-free returns.
- They are widely available.
- There are no complex contract terms or tax traps.
- They can be moved into an adult ISA so your child can continue to invest tax-efficiently.
- As there are no options to take the money out early, this can remove temptation to dip into the fund.
- The money is in the child’s name, which places it out of the equation if the parents are impacted by divorce, bankruptcy or require means-tested benefits.
There are a few possible downsides to Junior ISA investing:
- The money cannot be accessed early. This means that if money is required for education or a 17 year old’s first car, you will need to look at other options.
- On the other hand, the child will be absolutely entitled to the money when they reach age 18. When you start saving for a newborn, you won’t know whether your child will be responsible enough to handle a lump sum until it is too late.
- There are limits on contributions, which can be restrictive if you want to save larger amounts or undertake Inheritance Tax planning.
Other Options for Saving for Children
There are a few other options which allow you to save for children:
- Savings accounts – the money is held in the child’s name. However, if the money was gifted by the parents and the interest exceeds £100 per year, it is taxable as the parents’ income.
- Premium bonds – these can be accumulated for a child and transferred into their name from age 16. No regular interest is paid, but there is a chance of winning a cash prize every month.
- Friendly society policies – these allow you to save modest amounts towards a fixed maturity date, without tax implications. These are no longer as widely available as Junior ISAs have increased in popularity.
- Placing money in trust – this allows you to ring-fence money for one or more beneficiaries. Trusts are widely used in estate planning and due to the costs, complexity, and potential tax implications, are most suitable for wealthier families. Advice is always recommended.
- Pensions – you can contribute up to £2,880 to a pension for your child. This will be grossed up to £3,600 with the addition of tax relief. This can provide a solid foundation for your child’s retirement, although they will have to wait until at least their late 50s before they can access any of the money.
If you are thinking of saving for children, JISAs can be an excellent option if you are prepared to allow them full access at age 18. If you are not sure about this, a combination approach (e.g. contributing to both a JISA and a pension) could offer greater peace of mind.
The value of investments can fall as well as rise and is not guaranteed. Past performance is not a guide to future returns.
If you would like to set up a Junior ISA for your child or grandchild, please contact us today.
The content in this article was correct on 29/07/2023.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on pensions for teachers and non-teachers. Please use the contact form below to arrange an informal chat with an advisor and see how we can help you.