If you’ve ever spoken to another parent about saving or investing for your children you’ve probably come across a Junior ISA (or JISA). It’s one of the most common ways to put money aside for their future but what exactly is it, and how does it work?
A JISA is a tax-free way to save or invest for children. This means that you don’t need to pay any income tax (on interest you earn from savings), dividends tax (on any dividends you receive from stocks & shares) and capital gains tax (on any profit you make) on your savings or investments.
Here are five things you should know about Junior ISAs
There are two types of JISAs, cash JISAs and stocks & shares JISAs. You are allowed to have a cash JISA and a stocks & shares JISA for your child but you’re not allowed more than one of each type. This means if you’ve already got a stocks & shares JISA with one provider, you can’t open up a new one with another provider (you can transfer though as mentioned later).
A cash JISA is normally provided by a bank or building society and works in a very similar way to savings accounts. You deposit cash and the Junior ISA pays a fixed interest rate back to you (this rate can vary so worth always making sure you’re on the highest possible rate).
A stocks & shares JISA is an investment account. This means that the money you put in buys stocks, shares and other investments. Because of this, the return isn’t guaranteed and whilst they tend to perform better than cash JISAs over the longer term, the value of the investments can sometimes go down as well as up.
If you haven’t already done so, you can read our earlier post for more information on the differences between saving & investing.
If the child is under 16, then only the child’s parents or a guardian with parental responsibility can open the Junior ISA. This person then acts as the “Registered Contact” essentially meaning they’re the one responsible for managing the account, making sure it’s up to date with the latest contact information and informing the child when they turn 18.
Once a child turns 16, they can open their own junior ISA (if they don’t already have one open for them) and they can manage an existing Junior ISA that their parents opened for them. They can also open up a cash adult ISA (can’t open a stocks & shares adult ISA until they’re 18). This can be really useful if they’re maxing out their Junior ISA allowance already and want a larger tax free allowance.
Despite these strict opening rules, the rules of who can contribute to a JISA are more relaxed as anyone can contribute to a JISA providing the total amount contributed in a tax year is less than the annual allowance. This can be really useful when others (grandparents, godparents, aunts, uncles, you name it) want to chip in too. Not every provider allows contributions from non-parents so it’s worth checking the rules before you open an account. Here’s a list of some of the popular providers who don’t currently allow non-parent contributions.
Just like an adult ISA, a JISA has an annual limit. This is the maximum you can contribute (pay in) in a given tax year. For this tax year (20/21) the limit is £9,000 but this can change from year to year so make sure you keep an eye on it.
This limit applies across both types of JISAs (i.e. if you put £3k into a cash JISA in a tax year, you can only put £6k into a stocks & shares JISA in the same tax year) and is per child. So if you can afford to, and you have more than one child, you can put £9k into each of their JISAs.
This limit is the maximum you can pay in for this tax year and with most providers there is no minimum contribution. If you wanted to, you could put in just £5. You can also choose how you contribute money to your Junior ISA - a one off payment, or a monthly direct debit.
Except for extreme circumstances (e.g. terminal illness or death), all money in a Junior ISA is locked up and can’t be withdrawn until the child turns 18. This means that a Junior ISA is not an appropriate way to save/invest for short term goals such as nursery fees / private school fees etc.
When the child turns 18, the account will automatically change from a Junior ISA to an adult ISA. This means it can retain it’s tax-free status until the account is closed. At this point the child also has the option to withdraw the money for whatever they like, whenever they like, which means the parent(s) cannot control how the money they save up in a Junior ISA is ultimately spent by the child.
The junior ISA was first introduced in 2011. Most children born before then (3rd January 2011) but after September 2002 would have had a Child Trust fund automatically opened up for them when they were born with a £250 contribution from the government. An additional £250 contribution was given by the government when the child turned 7. Child trust funds have since been scrapped but a huge amount of them still exist and they’re not always the easiest to manage (and can also have quite high fees).
You can transfer old child trust funds or existing Junior ISAs to a new provider. To do this you normally need to select the new provider you want your JISA with. Each provider has a slightly different process but it usually involves completing a form which asks you questions about your child trust fund (or current JISA). Once this is done the new provider will contact the old provider to arrange the transfer. The whole process can take anywhere from a week to 30 days depending on the providers.
Currently, the best rate you can get in the market is 2.95% from Coventry Building Society. Out of the better known “high-street” banks, Santander is the lowest offering only 0.75%. However these rates are variable so be sure to check around before making any decision.
To help you picture the savings you could achieve through a Cash JISA we’ve included an example of the expected balance your child could have at 18 if you were to invest £100 per month for 18 years from when your child is born. This example assumes no change in interest rates for the 18 years (which is unlikely to happen) but it should hopefully let you see how even a small difference in interest rates can add up over 18 years.
A final thing you should know about cash JISAs is that they’re usually completely free to open and maintain and unlike savings accounts, the majority can be opened online.
It’s a little bit harder to answer this question as they don’t offer a guaranteed rate of return (with stocks your value you can go up and down). So instead you should consider what your requirements are and find a provider that meets them. Here is a list of things that we think are important when selecting a stocks & shares JISA provider.
When investing, your capital is at risk and may be going up as well as down which means you may be left with less than your initial investment. This article should not be read as personal financial advice. Individual investors should make their own decisions or seek independent advice. Past performance isn’t an indicator of future performance. Please note that tax treatment depends on the individual circumstances of each client and may be subject to changes in the future.