There are a number of ways to build up a nest egg on behalf of a child, but one that every saver should consider is the Junior Cash ISA. This is a type of interest-paying savings account through which adults can save up to £9,000 a year on behalf of a child, tax-free.
What's in this guide to Junior Cash ISA Accounts?
- How do Junior Cash ISAs work?
- Pros and cons of Junior Cash ISAs
- Where are the best Junior Cash ISAs?
Whar are Junior Cash ISA Accounts and how do they work?
The Junior ISA (JISA) is a savings account for children which sits within an Individual Savings Account (ISA) tax wrapper. You can choose a Junior Cash ISA, or a Junior Stocks & Shares ISA if you want to invest, or you can have one of each. In a 2020 Budget surprise, the amount you can put into a Junior ISA rose to £9,000 in the current tax year, more than double the limit of the previous year.
Pros and cons of children's Junior Cash ISA Accounts?
The main advantage is the tax break the JISA offers. Children have a personal allowance just like adults, even though they are unlikely to have an income. With this plus the £5,000 starting savings allowance and the £1,000 personal savings allowance, they could earn £18,500 tax-free, including interest on their savings. However, when parents and step-parents save on behalf of a child outside of an ISA, any interest earned above £100 a year (per parent) would be taxed at the parents’ tax rate, so it makes sense for them to use the Junior ISA to save more tax efficiently for children.
The interest rates you can earn are higher than on adult ISAs, although bear in mind that rates are variable so they could change. But if this happens and the rate on your JISA falls, you can switch to a new provider using an ISA transfer. If you’ve got a Child Trust Fund, you can transfer this into a JISA.
Anyone can pay into a JISA, whether parents, grandparents or family friends, but no withdrawals are allowed until the child reaches 18.
Your savings are protected up to £85,000 per financial institution under the Financial Services Compensation Scheme.
While the new JISA allowance is high at £9,000, you can pay in much less than this, with some accounts available with a starting balance of just £1. But, unlike the Child Trust Fund that the JISA replaced, there’s no government contribution.
A Junior ISA could be a good idea if you think the child could have a decent pot of savings by the time they reach adulthood – 18 years of birthday and Christmas money, plus interest compounded, means this is certainly possible. When the named account holder turns 18, the JISA automatically converts into an adult ISA, meaning the savings remain tax-free.
A possible downside is that a child can take control of their Junior ISA at the age of 16, and they can withdraw from it at 18. Not all 18-year olds will be able to resist the temptation to spend that money on electronic gadgets or a holiday, when you might have intended it for university fees, driving lessons or a house deposit. You have no control over what happens to the money once the child comes of age. If this is a concern, you could save for them in your own adult ISA instead.
Here are a few of the best Junior Cash ISA Account deals available at the moment:
- The top payer at the time of writing was Coventry Building Society’s Junior ISA, paying a variable AER of 3.6% on balances of £1 or more. The account can be opened and run in branch, by post or by phone.
- National Savings & Investments Junior ISA pays 3.25% AER variable and can be opened and managed online.
- The Santander 123 Junior ISA pays 3.25% AER variable but you have to open the account in branch.