Written by: Valerie Hazelrig
Opening a Junior ISA is the ideal way to give your child a nest egg for their future, and they usually remain tax-free savings until they turn 18.
But is it really worth it?
After all, the interest gained on a Junior ISA is tantalisingly tax-free, and they can often pay substantial dividends. But there are downsides too, and they’re not appropriate for every child.
Let’s take a look and see if a Junior ISA is right for your child.
Is my child eligible?
Around 6 million children were eligible as of 2011, and around 800,000 newborns each year can also get a Junior ISA.
If your child is under 18, they are eligible if they were born on or after January 3, 2011, or they were born before September 2002.
However, children born between September 1, 2002, and January 2, 2011 cannot get a Junior ISA – if you wish to start saving on their behalf, you must open a Child Trust Fund instead.
What are the options?
There are two different types of Junior ISA – a Junior Cash ISA, where interest is not taxed, and a Junior Stocks and Shares ISA, where on the whole, returns are tax-free.
£3720 is the maximum amount that can be put in a Junior ISA per tax year, and the money only becomes available once the child turns 18. The tax year runs from April 6 to the following April 5.
Once a child turns 18, the Junior ISA is turned into a normal ISA, which safeguards the tax-efficient benefits.
What are the benefits of opening a tax-free Junior ISA? Are they beneficial for every family?
The answer is no – they tend to be of limited benefit, and usually to more affluent, debt free families.
Most children don’t pay tax anyway, unless they earn more than £9440 per year, which is fairly improbable unless you have a budding Honey BooBoo parading around your house in a tutu and tiara.
Can I save my own cash in a Junior ISA?
No. They have been designed to stop parents using their child’s tax-free allowance for their own large savings, then keeping the interest themselves. This is the case if the money given to a child by each parent accrues more than £100 per year in interest.
However, if the money is a genuine gift from friends and relatives, it’s tax-free for children who do not earn more than £9440 per year.
Eventually, I want my child to spend their ISA on tuition fees, or a mortgage deposit – is this guaranteed?
The answer is no. The money is locked away, like a pension – and cannot be accessed until the child’s 18th birthday. However, once they get to the key to the door, they can do whatever they want with the cash. Imagine your child grows up into a rebellious young adult – they can withdraw the cash, and spend it on a fast car, drugs, and alcohol. Consider this carefully – do you want your child to have autonomy over their own savings, once they turn 18? Saving in your own name, in your own tax-free cash ISA could be the better option.
If you’re interested in opening a Junior ISA, an appointment with the bank manager or an independent financial adviser is the next step. They will assist you in working out how much your child could gain from opening such an account. As it’s a relatively new product, the market choice is somewhat restricted, so do your homework thoroughly, and find the best one, with the best benefits for your child.