Junior ISAs are a result of the Government’s attempt to replace child trust funds, which were closed to new entrants in 2010. Like child trust funds, they aim to offer an incentive for parents to start investing for children. Our Junior ISA guide covers what to expect from this product, and what differences you may find between Junior ISAs and child trust funds.
What is a Junior ISA?
Junior ISAs work in a very similar way to their adult equivalent, and are fairly similar to the child trust funds that they are replacing. They offer tax free savings of up to £3,600 a year in either cash or stocks and shares accounts (or both).
Like adult ISAs, you may only have one cash and one stocks and shares account open at any time. Unlike adult ISAs, anyone can put money for a child into a Junior ISA: parents, family and friends. For a more in-depth look at ISAs, see our ISAs guide.
Child trust funds and Junior ISAs
The biggest difference between Junior ISAs and child trust funds is the lack of a child trust fund voucher. The child trust fund voucher was a guarantee from the government to invest at least £250 on opening of a child trust fund and a further £250 at a child’s seventh birthday as an incentive to start saving. Junior ISAs offer no such incentive, and are instead built on the hope that tax benefits provide enough encouragement to start investing for children.
The maximum amount you can invest each year is £3,600, triple the amount you could invest in a child trust fund. However, the ‘stakeholder’ accounts that were available from child trust funds which offered ‘life styling’, where the investment options where changed in line with your child’s age are not a feature of Junior ISAs.
Current child trust fund holders cannot transfer their savings into a Junior ISA, which may be a problem if child trust fund rates lose competitiveness. The government has declared its wish to bring the two products ‘closer together’, which may mean that transfers could be made possible in the future.
If you have a child trust fund account you are not eligible for a Junior ISA.
Types of Junior ISA
Cash ISAs
Whilst certainly being lower risk than stocks and shares ISAs, cash ISAs will only accumulate interest (not capital gains), so you may end up suffering a loss in real terms if inflation rises. The fact that the ISA is tax free may not actually affect your child, as most children don’t pay tax anyway.
Gifts from step-parents or family friends may be subject to tax if not made through a Junior ISA, however. If this won’t affect your child’s savings, then it may be worth considering other savings accounts – if they pay a better rate of interest.
Share ISAs
With a share account, you will have access to a wide range of funds and more specialist investments. As with standard ISAs, the risk here is balanced with the possibilty of greater returns, and many experts advise that share ISAs often work out better in the long term. However, whether you want to put your children’s money in a risky environment is a decision that depends on personal circumstances.
Remember, you can split your savings between a cash ISA and a share ISA, but you can only have one of both. Both of these accounts are available from major banks and building societies, so shop around for the best rates.
Ethical or religious investment criteria
Investment managers normally choose shares on the basis of the maximum profit they can make rather than whether they agree with the ethical policies of the company. If you want to ensure your child’s money is invested ethically, you can choose a share account fund which invests on an ethical or environmental basis. Shari’a accounts are also available which stick to Muslim principles and will not invest in areas such as alcohol, tobacco and gambling.
Money in a Junior ISA
Withdrawing money from a Junior ISA
When a Junior ISA is opened, the money is ‘locked down’ until the child turns 18, and it cannot be accessed. From 16, however, the account is put in the child’s control – so they can invest it how they wish. The money, in the eyes of the law, belongs to the child for the entire period in which the Junior ISA is open.
Investing for children after 18
The default option when the owner of a Junior ISA turns 18 is for the money to be shifted into the equivalent adult ISA. If the owner does not wish his to happen, they can either withdraw it or reinvest elsewhere. The child has complete control over what to do with the contents of the ISA.
Tips when investing for children
- As the child trust fund voucher has been taken away, the key incentive of a Junior ISA is the tax benefit.
- It’s worth spending some time considering how you want to invest through a Junior ISA, as there can be large differences between returns from cash or share ISAs.
- A Junior ISA is a long term investment, so it might well be worth choosing stocks and share over cash as it has greater potential over long periods.
- Remember, once you put money in a Junior ISA your child won’t have access to it until they are 18.