"Happy birthday!"
"It's the big one!"
"Welcome to grown-up land!"
It's your teen's 18th birthday. Suddenly the face looking at them from the bathroom mirror isn't a child, it’s an adult. They may feel just like they did yesterday but - scary thought - the law of the land now looks at them very differently.
They have new rights. New responsibilities. New challenges and opportunities.
And hopefully, because their family (which probably means you) have planned ahead, they’ve got a pot of cash shaped like a Junior ISA.
Of all the presents you can give them as they turn 18, a generously-filled savings account has to rank as one of the best. It's not just an expression of your love and support. It’s also a massive help as they plan to take their first step towards financial freedom. Exciting.
Right now you can put a whopping £9,000 a year into a Junior ISA. Even if that number sounds a bit big for you, every pound you can put in is an investment in their future.
So once the 18th birthday fizz and balloons are over, they still have the security of that pot of cash.
Just imagine the look on their faces when they find out they can go after their dreams without stressing. Phew.
And you'll have their gratitude, for thinking so far ahead. Win win!
Take advantage of your Junior ISA allowance
Junior ISAs are all about encouraging you to put money aside for your kids. They gently nudge parents, grandparents and the like into saving on behalf of the next generation.
Specifically, this nudging is done through tax breaks. All the growth that the savings enjoy, either through interest or income from investments, is protected from the taxman.
It's all entirely tax-free. Woo-hoo.
On top of that, every penny dropped into a Junior ISA is owned by the child whose name is on the account. They can't get to the cash before they're 18, and neither can anyone else.
The money is ring-fenced until the day of that big birthday. After that, your kid can choose to keep saving or they can do something else with the money.
As someone with parental responsibility for your kids, Junior ISAs give you a unique opportunity. Only you, as their parent or guardian, have the right to open a Junior ISA in their name.
That's a privilege you don't want to take lightly.
The two types of Junior ISA
The Junior ISA comes in two flavours:
- Cash Junior ISA
- Stocks and shares Junior ISA
You can probably spot the difference. One grows because interest is added to the savings (that’s the cash version). The other grows because the money is invested in stocks and shares.
Either way, that growth is entirely tax-free - your kid gets to keep all the interest or growth from investments. Cha-ching!
You need to know that, when investing, you might end up with more money than you've put in or less.
The rewards of a stocks and shares Junior ISA could be higher than the cash-based version, but so too are the risks.
You need to decide how much risk you're willing to take with the money being put into the pot.
The good news is that children are allowed to have two Junior ISAs - one stocks and shares Junior ISA and one cash Junior ISA.
You can spread the risk by having one of each flavour. If you have both, you can split the contributions into either as you like. Easy-peasy.
But don't forget you’ve only got a £9,000 allowance in total, not £9,000 for each type of Junior ISA
And once the tax year finishes (which is on 5 April), that allowance is gone forever, sob sob.
If you want to plan your savings to be as tax-efficient as possible, put a note in your diary for say, February or early March. And remind yourself to check whether you want, and are able, to put any more into the ISA before that year's allowance is lost.
That cap of £9,000 is for tax year 2022-23. But it may change in future years.
How safe is a Junior ISA?
Having taken advantage of some, or all, of that Junior ISA allowance, you don't want to be told there’s a chance the money can disappear into a financial black hole.
For the most cautious, the cash version is the best bet. It gets bigger every year, thanks to that tax-free interest. Because the interest rate is usually set in advance you can predict how the numbers will grow.
Keep in mind that while the cash value of a Junior ISA will go up over time, it might not keep the same value in real terms. This is because of inflation.
Say you plop £1,000 into the ISA when your kid is six months old. If prices keep going up at a higher rate than the interest paid then that same £1,000 probably won't buy you as much 17 ½ years later.
But what happens if the financial institution hosting the ISA runs into trouble?
That’s really unlikely, but if it does, there’s an arrangement called the Financial Services Compensation Scheme (FSCS). This protects your savings up to £85,000. Phew!
The picture is a little different for a stocks and shares Junior ISA.
As we've already mentioned, because it's based on investments there is a better chance of beating inflation, but you might end up with more money than you’ve put in or less.
The FSCS may also protect your investments up to £85,000.
As the parent, or person with parental responsibility for your kids, you can move the Junior ISAs between different providers.
Let's say you set one up when your child is born but after a few years you spot that another provider offers a Junior ISA product that looks better. You can decide to move the current pot to this new one.
You can also switch it from being a cash Junior ISA to one based on stocks and shares, and vice versa.
What else do I need to know about a Junior ISA?
Here's a quick recap of what you really need to know about Junior ISAs:
- Each of your kids can only have two, one cash and one stocks and shares.
- The max that can be put into both these ISAs is £9,000 a year (based on the 2022-23 allowance).
- All the income, from interest or investments, is tax-free.
- Only your kid can withdraw the cash, and only after they've turned 18.
Does your kid have a Child Trust Fund?
These are savings accounts set up by the government for children born between 1 September 2002 and 2 January 2011.
The government popped £500 into each one, to get the savings going. Kids with these can't also have a Junior ISA. However, these can be transferred to a Junior ISA.
Most Junior ISAs are opened by parents for their kids. If someone else is playing the role of parent in the eyes of the law, they can open one. When your kids turn 16 they can choose to open a Junior ISA in their own name.
Junior ISAs don't close when the big birthday dawns.
They automatically flip into a full, adult ISA. That Junior ISA allowance of £9,000 jumps up to the full allowance of £20,000.
Your kids can keep saving! Woo-hoo!
Start building that birthday lump sum now
The sooner you start putting money in, the bigger that birthday pot will be.
When you get into the habit of saving for your kids, you're helping to give them a more financially secure start into grown-up life. Yay!
That's one reason why there's a Junior ISA allowance. It's not really there to cap how much you put aside each year by saying '£9,000 and no more'! It's more to encourage you to put something aside every year.
You'll be surprised at what a difference the snowball effect can make. Drop in smaller amounts of cash and, over time, that lump sum should grow into something to make their eyes pop when you tell them about it.
Great though they are, Junior ISAs aren't the only way to grow a nest egg for your kids. We recommend that you look into other ways of saving.
There's a security that comes with saving cash and earning interest, but it rarely offers the same rewards you could get from putting money into investments. So the option of blending both could be an approach to take.
To help you, we've put together a Guide about saving and investing for your children's future.
Don't forget, when you invest, your money is at risk. You might end up with more than you put in - or you might end up with less. And remember that what you're taxed depends on your own personal situation, and that can change in the future.
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