A Guide to Junior ISAs

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What You Need to Know

  1. A Junior ISA is a tax-efficient savings account aimed at children and young people under the age of 18.
  2. They are administered by the parents, but the money is officially owned by the child named on the account.
  3. Interest rates vary but all interest is tax free and there is an upper limit on money that can be paid in of £4,080 a year.
  4. There are two types of Junior ISA, a Junior Cash ISA which pays interest like any other savings account, and a Junior Stocks and Shares ISA, which invests the money in stocks and shares, and earns profits tax free.
  5. A new Help-to-Buy ISA is also being introduced later this year to help young people save for a deposit on their first house.
  6. All money held in a Junior ISA, should be protected by the Governments Financial Services Compensation Scheme (FSCS), although money in Stocks and Shares ISAs can make losses as well as profits.

What is a Junior ISA?

A Junior ISA, or Junior Individual Savings Account, is a tax-efficient savings account aimed at children and young people under the age of 18. They replaced Child Trust Funds in 2011, but unlike those funds, the Government does not contribute any money to a Junior ISA.

A Junior ISA has a maximum deposit limit of £4,080 a year, which can be divided up between the two available types of Junior ISA, a Cash Junior ISA and a Stocks and Shares Junior ISA.

A Junior ISA is controlled by the parent, or person with parental responsibilities, of the child named on the account, but it is possible for others, such as Grandparents, to make deposits into it. The child takes full control of the account themselves on their 18th birthday.

Who is eligible to have a Junior ISA?

Theoretically, a Junior ISA should be available to anyone under the age of 18.

However, the complexity of the way in which they have replaced their predecessor, Child Trust Funds, means it is not quite as simple as that, and they are not currently available to everyone in that age bracket.

If you child was born within the following dates, they can open a Junior ISA very easily:

  • On or after 3rd January 2011
  • Before September 2002 (and are still under 18)

If however they were born between 1st September 2002 and 3rd January 2011, the situation is a little more complicated.

Children born between these two dates would have had a Child Trust Fund automatically opened for them by the Government, and are therefore not entitled to open a Junior ISA.

However from April 2015, holders of Child Trust Funds have been entitled to convert them into Junior ISAs. If you are holding a Child Trust Fund, it is highly advisable to switch it over to a Junior ISA. The interest rates for Junior ISAs is are significantly better, as most banks and building societies concentrate their best rates on these rather than their predecessor, for obvious reasons.

Only if you hold an investment Child Trust Fund should you consider sticking with it, but it is best to consult your bank or a financial adviser before making this decision.

If you were born between these dates, or have a child that was, and are unaware of having a Child Trust Fund, visit the HMRC website to find out where yours is. There are more than 700,000 dormant Child Trust Funds in the UK, all of which will have money sat in them waiting to be claimed.

How do Junior ISAs work?

A Junior ISA obviously cannot be opened by the named holder themselves, but must be opened by the Childs Parent, or the person who holds parental responsibility for them.

It is possible for other relatives, such as Grandparents, and friends, to make deposits into the account on behalf of the holder, but only the parents can administer the account.

The money in the account is owned by the child, even when the parent is administering the account. However the child is not allowed to make any withdrawals from a Junior ISA until they turn 18 years old. They can however begin to administer the account on their own at the age of 16.

The upper limit for money that can be held in a Junior ISA is currently £4,080 a year. This upper limit is sometimes changed by the Government during Budgets though, so if you are keen to save more for child, keep an eye for any future changes.

If the upper limit of a Junior ISA is exceeded, any extra money will be held in a Savings Account in trust for the child. The money cannot be returned to the person who gave it. There is no tax payable on any funds held in a Junior ISA, but any excess funds will be subject to tax in the usual way.

Unlike an Adult ISA, you do not open a new ISA each year, but instead have a new annual limit added to your existing account each year.

When a child reaches the age of 18, a Junior ISA is automatically rolled over into an Adult ISA. They can if they wish, also withdraw the money at that time. It is their money, and they are entitled to spend it how they wish, although obviously family and friends will be counselling them to spend it wisely, as the intention of such a nest egg is usually to help them start out in the world, not just for them to enjoy themselves with.

The two types of Junior ISA:

As with regular ISAs, there are two different types of Junior ISAs currently available.

  • Junior Cash ISA: A Junior Cash ISA works in much the same way as an Adult ISA and indeed any other regular savings account. The account will have a set interest rate attached to it, and any money deposited in it will be paid interest at that rate. The main advantage an ISA has over a regular savings account, is that all the money kept in it is tax free.
  • Junior Stocks and Shares ISA: The money put into a Junior Stocks and Shares ISA is invested into stocks and shares rather than paid a guaranteed interest rate. There is more risk associated with this type of ISA as the value of Stocks and Shares can go down as well as up, but there is also the potential to earn more than a Junior Cash ISA as well. As with a Junior Cash ISA all profits made are tax free.

When opening a Junior ISA you can choose to have one or other of the above ISAs, or a combination of the two, provided the total amount does not exceed the upper limit of £4,080 a year.

Once you child reaches the age of 16, they can also contribute into the adult equivalent of a Cash ISA. This is permitted in addition to saving to the upper limit on a Junior ISA, giving them scope to save an extra £15,240 a year tax free as well.

Help-to-Buy ISAs:

Recently, a brand new ISA has been added to the ISA family. The Help-to-Buy ISA is a tax free account intended to help young people save specifically towards a deposit for their first home.

They will become available from autumn 2015 and you will be able to save up to £200 a month in them. They are expected to be administered in much the same way as a Junior ISA, with parents being able to open and administer them in the name of their child.

The real perk of a Help-to-Buy ISA is that the Government has pledged to top up the amount you save by a huge 25%, meaning each £200 deposit will receive an extra £50 completely free of charge. There is however a limit of £3,000 on this generous bonus though.

Help-to-Buy ISA’s look to offer excellent value for money, but the obvious limitation is that the money held in them can only be used as the deposit for the child’s first home. Details about how much the money has to be tied to the Governments separate Help-To-Buy scheme, or whether it can be used as a deposit for any house, remains unclear but more details are expected before the products official launch.

How safe is money held in a Junior ISA?

  • Junior Cash ISAs: Money held in a Junior Cash ISA is very safe. All cash held in UK bank accounts up to £85,000 in value (being reduced to £75,000 from January 2016) is protected by the Governments Financial Services Compensation Scheme (FSCS).

This means that any money held with a single financial firm is covered up to that value. Given the upper limits on Junior ISA’s, you can only save a maximum of £73,440 in a junior ISA as long as the current upper limit remains as it is, meaning your money should always be safe.

  • Junior Stocks and Shares ISA: BY their very nature, Junior Stocks and Shares ISAs are more risky than Junior Cash ISAs, and there is a risk that you could lose money on the investments you make, as well as earn it. However, on average Junior Stocks and Shares ISAs do tend to prove more profitable than Junior Cash ISAs.

Most Junior Stocks and Shares ISAs are held through an Investment Fund and if that company were to collapse, the same Financial Services Compensation Scheme (FSCS) would cover any amount held up to £50,000 per person.

 Further Reading

 

 

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