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Are Junior ISAs a good idea?

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Lots of parents in the UK save money on a regular basis to go towards their children’s future.  There are lots of different savings options from regular savings accounts to cash ISAs to Junior stocks and shares ISAs.  In this blog post I will explore my own story and whether Junior ISAs are a good investment idea.

Building a nest egg for your child’s future

When our children were born, one of the first things we did was to set them up a savings account.  It was a proud moment to be able to go to the bank each time with our new little bundle of joy and set them up their very first bank savings account.  We opened them with the intention of filling them with a lump sum that they’ll each have access to once they turn 18 to set them on their journey to adulthood.

Of course when they reach 18 they can spend their money on whatever they like, but we hope they will be sensible and I imagine this money to buy their first car, be a deposit towards their first rental property or to even to travel the world.  I hope it will be towards something quite significant or memorable.

Junior ISA – a better option?

The one thing we didn’t do when we had our children was to shop around for the best interest rate.  We didn’t really think about it at the time.  We simply opened the savings accounts at our current bank at the time as it seemed like the logical thing to do at the time.  It meant we could easily access all our bank accounts in one place.

Looking back, this was not the wisest decision we made.  Although it was the easiest decision, it was a poor money decision as the interest rate on their basic savings account is ridiculously low – it’s only 0.85% this year!

A better option from the start would have been to choose a Junior ISA investment instead.  These have more favourable interest rates.   Searching online today I’ve found a Junior cash ISA with a 3.6% interest rate.  There are also Junior stocks and shares ISAs which could aim to have a better return than this (the value of your investment in a stocks and shares ISA may go down as well as up).

A Junior ISA is definitely a great option to take advantage of a higher interest rate or potential returns when saving for a child’s future. I will share the benefits of a Junior ISA with you in this blog post.

What is a Junior ISA?

A Junior ISA is a long-term and tax efficient way to invest money on behalf of your child. 

An Instant Savings Account (ISA) isn’t just for adults, but children can benefit from their higher interest rates too.  The only difference is that it belongs to your child, not you.  

Children can’t access their ISA until they are 18 and you can’t take the money out as it belongs to your child.

It’s a long-term investment. 

There’s also a limit on how much you can deposit into a Junior ISA.  In 2018-2019 the savings limit for is £4260. 

There is no tax to pay on any interest, returns or dividends.

What are the different types of Junior ISA?

There are two types of Junior ISA accounts – a cash ISA or a stocks and shares ISA:

  • Junior cash ISA – this type of ISA earns interest just like a savings account. The interest rate is can be fixed or variable depending on the bank.   It’s basically like a tax-free savings account where the original investment is not at risk.  This is good if you want to ensure you get your original investment back and opt for a low risk strategy.  The maximum investment is £4260.
  • Junior stocks and shares ISA – As suggested by the name, this type of ISA invests your savings into stocks and shares with the aim of greater returns than the fixed rate of interest on a cash ISA.  A stocks and shares junior ISA allows money to potentially work a bit harder to return some better gains than just a normal savings account.  The value of the entire investment may go down as well as up.  The maximum investment is £4260. 
  • Choose both – you can open both types of ISA for your child with a total deposit limit of £4260 per year which you can split however you like across the two ISAs.  The two ISAs do not need to be with the same provider, so you can shop around for the best deals.

It’s important to note that you can’t have a Child Trust Fund (CTF) at the same time as a Junior ISA.  You can, however, convert the full balance of a CTF into a Junior ISA.

How much can I invest in a Junior ISA?

In 2018-2019 the annual savings limit is £4260.  This is across all Junior ISAs, so if you choose to open both a cash ISA and a stocks and shares ISA then the combined limit is £4260. 

In 2019-2020 the limit will increase to £4368.

Who can open and contribute to a Junior ISA?

A parent or legal guardian must open the account on behalf of a child under 18 in the UK.  This person will then be the contact for the account.

Once the account is open then anyone can contribute up to the maximum limit of £4260.­

Can I withdraw money from a Junior ISA?

No.  You can’t withdraw from a Junior ISA.  It’s only accessible by your child once they are 18.

Once the money is invested in a Junior ISA it stays there until the child is 18.  You can transfer a Junior ISA to a better rate, but you can’t take the money out to use it for anything else.  The cash is basically locked away until your child is 18.

What happens to a Junior ISA at 18?

At age 18 the ISA will be transferred to an adult ISA unless the child withdraws the balance and closes the account.

Once your child reaches age 18 they have access to the money in their ISA.  They can actually have access to their ISA from age 16, but only to manage the account.  To withdraw money from their ISA they need to be 18.

Final thoughts 

A Junior ISA definitely seems like a great way to invest money long-term for your child's future.  I think it's a good idea and the interest rates on the cash ISAs are very appealing.  If you're looking to potentially make a higher return then consider a stocks and shares Junior ISA.  I like that funds are locked away until the children are 18 and that they can be transferred to another Junior ISA with a different provider if wanted.  Just make sure you do your research before committing as once the money in in a Junior ISA it will be locked in one until your child is 18.