Individual Savings Accounts (ISAs) aren't just for grown-ups: kids can get in on the act too. Called Junior ISAs or JISAs for short, they're similar to the adult version, but allow you to save for longer.
If you open a JISA when your baby is born, you could build a pot of over £74,256 by the time they can access it.
A JISA is essentially a long-term, tax-free way to save for your children, so long as they live in the UK and are under 18. Only a parent or legal guardian can open and manage the account, but once it’s set up, anyone can pay into it.
Lynn James, a personal finance expert and founder of the blog Mrs Mummypenny, offers sound advice when it comes to savings for kids.
“Even when times are tough I put money aside for my three boys,” she says. “As the years progress, things are getting more expensive, things like university, car insurance or buying a first house. Any nest egg will be a great help. They have a Junior ISA each and regular easy-access savings accounts. Recently, however, I have switched to putting money into my own ISA for my children instead.”
Lock in the savings until they're 18
The maximum you can put into your child ISA during the 2019/20 tax year is £4,368. This allowance has recently been rising every year in line with consumer price index inflation, and with the allure of tax-free growth, it’s a popular way to save. According to HM Revenue & Customs 1, 907,000 JISA accounts were opened during 2017/18.
Importantly, with a JISA, the money belongs to your child and is “locked up” until they reach 18. At this point, it changes into an accessible adult ISA to spend as they please. Your child can manage their account at 16 if they want to but can’t touch the money before turning 18.
Choose cash , stocks and shares or a mix of both
There are two types of Junior ISA – a cash JISA or a stocks and shares JISA with the option to mix and match. You can hold just one, or one of each type and split the Junior ISA allowance of £4,368, in any proportion, between the two. You can also transfer from one to the other and switch to a new provider should you want to.
Most banks and building societies offer cash JISAs, usually with a minimum deposit of £1. It’s best to shop around for a good deal, then monitor your JISA’s rate of interest. If it drops, be ready to switch, but check this option is available when you first apply.
With a stocks and shares or investment JISA, if you start saving when your child is born, or soon after, an 18-year investment offers plenty of time to grow and ride out the ups and downs of the stock market.
If you can tolerate more uncertainty in the market over this long period, you could invest to gain greater returns, which would potentially increase the amount of money in your JISA compared to the rates offered in a cash JISA.
You don’t need to be an expert to start investing
If you’re not sure how to start, most providers will give advice and manage a stocks and shares JISA for you. With our partner Wealthify, you can open a Junior ISA from just £1.
However, a minimum £10 to £25 monthly investment is typically required, but always check your provider’s fees and charges as these could impact on your investment returns over time.
You can choose a portfolio to reflect your values – if it’s important you invest in companies making a positive impact, Wealthify’s ethical fund providers are signatories to the Principles of Responsible Investing.
This means your money won’t go into industries and activities considered harmful to society and the environment, like tobacco, gambling, deforestation and unfair labour practices.
Next, depending on the level of risk that suits your situation, Wealthify will build you a JISA plan, chooses which investments to buy and manage them for you. Remember that the value of your investments can fall as well as rise and you could get back less than invested.
Suzanne Dickerson, who works in Manchester and has an eight-year-old daughter, says: “At this point, I would like to invest in a Junior ISA, but I’m concerned about green and ethical issues. I would want to exclude investing in any industries harmful to the environment, especially those linked to deforestation. For this reason, I'm considering a Wealthify Junior ISA.”
If your child is approaching 16, prepare for a bonus as 16- and 17-year-olds qualify for two ISA allowances. This is because they're allowed to open an adult cash ISA (with a £20,000 allowance), alongside their Junior ISA, which won’t turn into an adult ISA until they turn 18. Under current rules, they could put away £24,368 in ISAs for the 2019/20 tax year.
Can your child have a Child Trust Fund instead?
Before the JISA was introduced in 2011, you could save or invest tax-free through a Child Trust Fund (CTF). This government scheme made sure every child who qualified arrived at adulthood with a tax-free savings account and a lump sum. If your son or daughter was born between 1 September 2002 and 2 January 2011, you would have received free cash vouchers to open a CTF and start putting money aside.
Although the scheme closed in 2011, existing Child Trust Fund accounts continue to operate until all children in the scheme reach 18. Whether you save with a CTF or a JISA, your annual tax-free allowance is the same.
Your child can’t hold a CTF and a JISA at the same time, but you can transfer their CTF to a JISA. It may be worth considering this if you have a cash CTF as Junior ISA rates are better. However, if you hold a shares CTF check the transfer and management fees before switching to make sure it’s worthwhile.
Consider a child savings account
As money can’t be withdrawn from a JISA or CTF until your child is 18, you may want to explore other young savers accounts.
Before you do, the Money Advice Service offers some words of caution. If you’ve given your child money that earns over £100 a year in interest, dividends, rent or any other investment income, the interest will be taxed as if it were yours.
This could push you over your personal savings allowance. On the upside, the £100 limit does not apply to money given by grandparents, relatives or friends.
The best children’s savings accounts offer more generous interest rates than adult options. However, they do come with requirements, so make sure the account suits you and your child’s circumstances.
Choosing the best savings account for your kids
Regular children’s savings accounts let you put away a fixed amount with a minimum deposit, each month, usually for a set term of a year. These are great for smaller amounts, offer attractive interest rates but have withdrawal restrictions.
For larger amounts, easy-access children’s savings accounts let you and your child add or withdraw cash at any time. But what you gain in flexibility you lose in interest as rates are lower than regular savings or fixed-rate accounts.
If you don’t mind committing your money from one to five years, children’s fixed-rate savings accounts, or bonds, offer a better-guaranteed rate in return. But note that you can’t withdraw money during this time, so can’t switch should the interest rates rise.
A junior savings account can offer some valuable early lessons in money management. And if your child is intent on spending their JISA money wisely at 18, there’s even more good news. With a new generation of products designed for millennials, such as the Lifetime ISA, there’s every hope they will carry on stashing the cash, tax-free, for years to come.