Not sure how Junior ISAs work, or whether they’re right for you? Don’t worry – here we cover exactly what you need to know.
What are Junior ISAs?
Junior ISAs are tax-free savings accounts for kids aged under 18. They allow you to save or invest up to £4,000 per tax year (£4,080 from April 2015). The idea is that you build up a tax-free nest egg for your child over time.
Think of a Junior ISA as being like a bag. Any money you put in the Junior ISA ‘bag’ (up to £4,000 a year) is protected from tax. This means that any interest the money earns is not subject to tax.
Who can get a Junior ISA?
Any child aged under 18 can get a Junior ISA, as long as they:
- – Were born on or after 3rd January 2011
- – Were born before September 2002
Children who were born between 1st September 2002 and 3rd January 2011 can’t get Junior ISAs – they get Child Trust Funds (CTFs) instead.
How do Junior ISAs work?
- As a parent or legal guardian, you open a Junior ISA on your child’s behalf
- You (or other members of your family) can contribute up to a maximum of £4,000 per tax year (£4,080 from April 2015)
- If you don’t use your ISA allowance of £4,000 each tax year (April 6-April 5) you lose it. You can’t ‘roll over’ your allowance into the next year
- You can pay as much or as little money in as you like, as often as you like (provided it doesn’t go over the £4,000 annual limit)
- With Junior ISAs, no tax is payable on interest or investment gains earned
- When your child reaches 18, the Junior ISA automatically becomes a normal adult ISA. This means they can continue to add to their tax-free nest egg into adulthood
- Bear in mind that when your child reaches 18, full control of the ISA account is passed to them (not their parents or guardians).
The two types of Junior ISA
There are two main types of Junior ISAs: Junior cash ISAs and Junior stocks and shares (investment) ISAs.
Junior cash ISAs
Junior cash ISAs work just like a normal savings account, except that the interest is tax-free and your child cannot access the money until they are 18.
Junior stocks and shares (investment) ISAs
With a Junior Stocks and shares ISA you can put your child’s savings into investments like shares and bonds. Any profits that are earned are then free from tax. Investment ISAs are riskier than cash ISAs (obviously investments can go down as well as up) but if your stocks and shares do well, the rewards are likely to be far bigger.
Which Junior ISA is right for me?
Ultimately, only you can answer that question! It depends on:
- 1. What your attitude to risk is
- 2. How old your child is
If you don’t like risk, or can’t afford to lose any of the money you save, then a Junior cash ISA is probably for you.
Stocks and shares ISAs can net your child far more money than cash ISAs; but they can also lose you big money, too.
Over the long term (we’re talking at least 10 years here) the stock market tends to outperform cash. So if you can afford to leave the money untouched for however long it takes to ride out any stock market wobbles (and your child is still young) then you may want to consider putting some money into a Junior stocks and shares ISA.
Mix and match Junior ISAs
If you wish, you can open both a Junior cash ISA and a Junior stocks and shares ISA.
Note that you can only open a maximum of one Junior cash ISA and one Junior stocks and shares ISA per child.
Also remember that the £4,000 maximum limit applies whether you have one Junior ISA or two.
- You could put £3,000 in a cash ISA, and £1,000 in a stocks and shares ISA (as £3,000 + £1,000 = £4,000 annual limit)
- You couldn’t put £4,000 in a cash ISA and £4,000 in a stocks and shares ISA (as £4,000 + £4,000 = £8,000, which twice as much as the £4,000 annual limit).
Transferring a Junior ISA
You can switch between the two types of Junior ISA (or from one bank’s ISA to another) whenever you like.
However ALWAYS use an ISA transfer form to move your money (just ask your bank or building society for one). If you don’t, your old ISA won’t be closed properly, and you’ll risk losing the tax-free status of your money.
At the moment you can’t transfer a Child Trust Fund account into a Junior ISA, though the government has said that this will change from April 2015.
Are Junior ISAs worth it?
Junior ISAs are a good savings option for your kids, but the best option for you depends on your circumstances.
On the plus side: if you don’t mind locking the money away until your child is 18, and want the tax benefits of an ISA, they can be a good option.
On the minus side: there’s nothing to stop you finding a normal savings account that might pay out a higher rate of interest, and putting your child’s savings in that.
(Just make sure you fill out an R85 form when you open a children’s bank account to ensure you don’t pay tax on your child’s savings. You can get an R85 form from your bank, building society or from the HMRC website).
Kids only pay tax if:
- – They earn more than £10,000 a year
- – They receive a wodge of cash from either parent that will earn over £100 in interest
But while your kids’ savings are probably tax-free now (whether they’re in a Junior ISA or not), they won’t be when your kids eventually start earning a salary. That’s when it is useful to have a tax-free ISA nest-egg that they can add to as they grow into adulthood.
KidStart offers money back for your children when you open an account with a number of different providers. See all of them here.