Junior ISA: Is it a Good Savings Tool?
We all want to do our best to ensure that our children have a solid financial start to their adult life. However, some parents may find that it’s not efficient to put money away each year to save towards their children’s future as they end up paying tax on it.
Junior ISAs are a Government initiative which started in 2012 to encourage parents to put money into savings for their children. Parents who are close to the tax-free annual limit for adult ISAs (currently £20,000) can choose instead to open a Junior ISA which gives them an additional tax-free savings limit a year, recently doubled up to £9,000.
In addition, parents of children with a Child Trust Fund (CTF) can choose to transfer the money to a Junior ISA, which may have a superior rate of interest. However, a child cannot have a Child Trust Fund and a Junior ISA, so parents have to decide which is more appropriate for them.
What is a Junior ISA?
A Junior Individual Savings Account (ISA) is similar to an adult ISA in that it is a long-term, tax-free savings account. Any child under the age of 18 who lives in the UK can have a Junior ISA. There are two types of Junior ISAs:
Cash Junior ISA: cash is saved in the account and no tax is paid on any interest accrued.
Stocks and Shares Junior ISA: the cash is invested in stocks and shares and no tax is paid on any dividends or capital growth received.
A child can have both types of ISAs but the annual investment is still limited to £9,000 in total ie if £5,000 is paid into a cash Junior ISA only £4,000 can be invested in the same child’s stocks and shares Junior ISA in the same year. If your child has both types of Junior ISA it is possible to transfer money from one to the other should you wish.
Who manages the Junior ISA?
A Junior ISA is opened and managed by the child’s parents or legal guardians. They will continue to manage the account until the child turns 16, when the child can take over the account and either turn it into an adult ISA or keep it as a Junior ISA until their 18th birthday, at which point it is transferred automatically into an adult ISA.
When can the Junior ISA savings be accessed?
Any cash invested in a Junior ISA account is wrapped up until the child turns 18. Neither the child nor the parents can access the money before then so you need to be sure you can afford to turn your back on the savings for several years.
Even when the child is 16 and takes over management of the account they can’t touch the money for another two years. However, a 16-year-old can open an adult cash ISA as well so if there is cash available to invest they could be in the fortunate position for two years of holding both a Junior ISA and an adult ISA with the combined tax-free savings.
How do I open a Junior ISA?
Once you have decided to open a Junior ISA for you child you need to choose a provider. Most banks, building societies, stock brokers, friendly societies and credit unions offer Junior ISA accounts so it’s a case of choosing where you want to put your money and filling in an application form.
If your child has a CTF account you will need to speak to your Junior ISA provider to arrange transferring the savings into the Junior ISA. A child cannot have a Child Trust Fund account and a Junior ISA in their name.
Why should I open a Junior ISA when my child already has a CTF?
Junior ISAs have effectively replaced CTFs as the Government-approved vehicle for parents to save towards their children’s future. Whilst CTFs will continue to exist and work in the same way as before, many financial institutions are concentrating their efforts and their best interest rates on the newer Junior ISAs. You may find that the interest rate offered for savings in your CTF is lower than the rate you could get for a Junior ISA.
As a child cannot have a CTF and a Junior ISA in their name, most financial providers will allow you to transfer your existing CTF into a new Junior ISA. However, before you jump into what is a permanent move, check whether it is in your best interests.
If your CTF is simply a cash fund then you should transfer the cash into a Junior ISA as you will get better interest rates. However, if you have an investment CTF you may find that your CTF provider charges fees to transfer out. You should also compare the fees charged by providers for a stocks and shares Junior ISA with those charged by your CTF provider – you may find you’re better off sticking with the CTF.
Best junior ISA rates for 2020/2021
- Coventry bulding society offers an AER of 3.6%. This is the biggest AER currently on the market.
- Danske Bank with AER of 3.45%
- Bath BS with AER of 3.25%
- Darlington with AER of 3.25%
They are all cash junior ISA accounts and interest on all is paid yearly. Access to money saved is granted once the nominee reaches 18 years of age.