Ways to save money for your children: ISAs

Under 18s are entitled to £9,000 of tax-free savings into an ISA every tax year. This means your child can have up to £9,000 per tax year in a Junior ISA (JISA), before it's subject to income tax and capital gains tax. If you want to start building some savings for your little ones, you could utilise their JISA allowance and open one. 

A JISA can also be a great way to teach your children about saving. Many providers have apps that let you and your kids track the interest in real time. 

Heads up, though: any money you put into a JISA belongs to your child and can only be withdrawn by them once they turn 18.

What types of Junior ISA can I choose from?

There are two types of JISA's. One is a Junior Cash ISA, If they do, this is easy because the JISA automatically turns into a standard adult ISA. Alternatively, you could choose a stocks and shares JISA. This ISA doesn't pay interest, but instead offers the potential for returns based on the performance of the stocks and shares your money is invested in. At Aviva we offer Wealthify's Junior Stocks and Shares ISA.

Should I choose a Cash Junior ISA or a Stocks and Shares Junior ISA?

A Cash ISA is generally considered a lower-risk option, since your money will grow as long as the interest rate is above 0%. A stocks and shares ISA, meanwhile, has the potential to provide a greater return over the longer term than a Cash ISA, although there is more risk. As with all investments, the value can go down as well as up and you may get back less than you put in. 

Which one you go with depends on the risk you're willing to take and how old your child is now. A cash ISA might be safer if you want a lower level of risk or if your child is only a few years away from turning 18. As we suggest investing for at least 5 years, a stocks and shares option might be better if your child is younger, as it gives the money more time and potential to grow. With a Cash ISA, the money will grow as long as the interest rate is above 0%. 

For example:

If you open a Junior ISA when you have a baby, you'll have 18 years to invest. So, that money will be invested for 18 years, giving it a better chance to weather stock market dips, increase in value and/or benefit from compound interest.

When the child reaches their 18th birthday, it will be up to them to decide whether they want to continue investing beyond this date. If they do, they can transfer to a regular stocks and shares ISA, or even continue to invest in their JISA.

If your child is 15 when you open the Junior ISA, you only have a few years before they're able to open and withdraw money from it. In this case, it might be safer to have a cash ISA, as it involves less risk.

If your child is old enough, you may want to have a conversation with them about their savings.

Whether you go for a cash JISA or stocks and shares JISA could depend on how old your child is when you open it and how long your child intends to keep saving or investing into it past their 18th birthday. If they're 14 or 15, for example, a cash ISA might be better because it might only be open for three or four years until your child is 18. It may also depend on your tolerance for risk. A stocks and shares ISA comes with a higher risk level, as stocks and shares can go down as well as up in value, meaning you might get back less than you put in.

That's not really long enough to expect a positive return on investment with a stocks and shares ISA, but you'll get a return with a cash ISA, albeit a low one. You just need to be aware that inflation will reduce the buying power of your money, particularly if the interest rate is less than the rate of inflation.

If you open an ISA when your baby is born, on the other hand, you'll have 18 years to invest. So a stocks and shares ISA could be a better option to try to make that pot of money grow as much as possible. As a parent, you may be put off by the thought of investing your children's money — due to the risk involved. But remember that you have an 18-year window to invest in order to weather those stock market dips.

You don't need to be a finance professional to start investing. You can open a Stocks and Shares ISA or JISA using an investment platform. Many platforms do the hard work of choosing investments on your behalf. All you have to do is choose how risky you want to get with your investments and make sure you regularly review your investments and their performance.

Making regular investing a habit

You don't need a big lump sum to get started with investing. In fact, paying a little bit in regularly is a great habit to get into. It has the added bonus of trying to cushion your investment against market volatility — an approach known as pound- cost averaging. It works because some months your investments will be more expensive if the market is doing well, but sometimes they will be cheaper if the market is down. So the cost of your shares should average out over time.

Ready to start saving for your children? Take a look at the Aviva Stocks & Shares ISA or explore a Junior ISA from our partner Wealthify.