Much has been made of ISAs in the past and how it’s a great way to save for the future, so much so that Junior ISAs have been launched to encourage parents, grandparents and other family and friends to help save for a child’s future. This means that should your child want to go to University, get married, have a gap year or put a deposit on their own pad, they have a lump sum when they turn 18 to help them do just that. However how does a Junior ISA work and what are the main benefits?
Child Trust Funds
If you had a child born between 1st September 2002 and 2 January 2011 then you benefitted from the government funded Child Trust Fund which gave every child a £250 voucher to start them off. These funds were unfortunately stopped by the Coalition Government in 2011 although those with existing trust funds can still pay into them. Children’s ISAs were launched in the same year and although the government do not contribute anything towards them, they were set up with the same principle as the CTF, to encourage families to save for their children’s financial future.
A Junior ISA (JISA) works in much the same way as an adults; you can save a certain amount each year tax free, which means that the interest you accumulate on your savings will be yours to keep, none of it will go to the taxman.
When the Children’s ISA was first rolled out in 2011 the maximum amount you could put in for them, tax-free, was £3,600 and this ISA allowance will most likely rise each year in line with inflation. What this means is that you can top up their ISAs each year by the maximum amount. You don’t have to provide a lump sum to do this, you or anyone else such as a family member or friend, can make regular or one-off payments throughout the year.
What Happens to Child Trust Funds?
No new funds can be opened but existing CTFs can still receive tax-free savings. The amount you can put into a CTF is the same as an ISA but unfortunately interest rates for funds are generally lower and at this moment in time it is not possible to transfer a CTF into a JISA or open a separate ISA for the same child, although the government will consider the possibility of tying CTFs more closely in with JISAs.
Junior Stocks and Shares ISA
This is where your investment is tied into the stock market with the level of risk dictated by you. Many Junior ISA Providers offer varying levels of risk although you need to remember that even the lowest risk accounts can go down and the child may end up getting less back than was originally saved.
The good thing however is that you can mix and match between investment and savings, putting less in one and more in another depending on how well they are doing. So long as you don’t go over the yearly amount, this could be a good way of getting the money to work harder, especially in the long-run where traditionally investments tend to perform better than savings.
What are the Pros and Cons of a JISA?
When you compare junior isa accounts you will realise that as with any savings accounts there are always strengths and weaknesses so it’s only fair that we list the main ones:
- No flexibility. There can be no early withdrawals (apart from death or critical illness) so that money stays where it is until your child is 18. If you think your child might need it earlier then you could be better off with a more flexible savings account
- A JISA belongs to that child and as soon as they reach 18 the money is accessible and can only be withdrawn by them – not by you
- Anyone can pay into the account which makes it ideal for grandparents and other relations
- You can make regular payments or one-off deposits as there is no minimum payment, so birthday money and pocket money can all be saved in this way
- There is no minimum start-up, accounts can be opened from as little as £10
- Interest is not taxed so whatever amount has been saved plus interest accumulated will go directly to the child no matter how much it is. So even if you’ve managed to save £80,000 over the years, so long as you kept within the yearly limit that amount will not be subject to income tax or capital gains tax
Whatever you decide to do, saving up for your children’s future is now considered a necessity if you want to give them a financial advantage and those savings do go down better when you know that the taxman can’t touch them!
Resources: For the official Junior ISA regulations please visit the UK’s Direct Gov website here.