The latest Junior ISA accounts help your children to start saving, they have a yearly ISA limit and we feature suitable products from UK financial organisations that are FSA regulated
About Junior ISA Accounts
Starting to think about your children’s financial situation from an early point will improve their prospects of future financial security. Junior ISA accounts are tax-free savings accounts that offer children under the age of 18 the opportunity to save up to £4,000 in 2014/2015 under the current regulations.
Junior ISA Accounts are an extension of the adult ISA system. Their core idea is to encourage families to start as early as possible to save for their child’s future and equally assist children to build up a financial cushion for their adult lives. While the process of saving can start at any time, children can only access the money at the age of 18, at which point they gain full possession over the money.
How do Junior ISA Accounts work?
Like the adult ISA allowance, also the Junior ISA allowance rises with the CPI inflation each year and increased to £4,000 at the start of July 2014.
A tax year runs from April 6 to April 5, which should be kept in mind to take full advantage of the overall allowance.
Junior ISA’s are a good way of introducing children to practical financial education, talking them through all decisions that need to be taken, such as choosing a suitable provider. Anyone with parental responsibility, such as parents or legal guardians, is eligible to open an account for the child.
Until the child reaches the age of 16, the holder of parental responsibility is entirely in charge of the account; after this, the child can participate in the decision-making process, while the money remains inaccessible until the age of 18.
Users of a Junior ISA do not have to put money into the account on a regular basis, as there is no obligation to use the allowance to the fullest or keep a minimum amount in the account.
Who is eligible for a Junior ISA?
Eligibility to use Junior ISA accounts is currently restricted to those born on or after the 3rd of January 2011 or before September 2002. Children born between the 1st of September 2002 and the 2nd of January 2011 are not eligible for a Junior ISA, as they can still use so called Child Trust Funds (CTF).
A small number of children born within this time frame, however, do not have a CTF, for example if they were not UK citizens at the time, and hence should be eligible to a Junior ISA.
This regulation is changing from April 2015, when Junior ISAs are replacing CTF’s and parents who took out a CTF for their child are able to move those to a Junior ISA.
What happens when the child turns 18?
Once the holder of a Junior ISA reaches the age of 18, the account is automatically transformed into a normal ISA, which allows the account holder to add cash until the ISA allowance of that tax year is reached, currently the overall amount for Cash ISAs and Investment ISAs is £15,000, all of which can be put in the account in cash.
Whether the interest rate is subject to changes after this will be regulated by the provider, however, account holders always have the right to change providers and transfer the money to another account.
In order to ensure that the adult ISA is set up automatically, it can be useful to provide the bank with the National insurance number of the child well in advance.
It is beneficial to know, that children aged 16 to 18 are eligible to both a Junior ISA and an adult one, which allows them to have a higher tax-free allowance than any other group. Opening both types of accounts for your child, you should however keep in mind, that they can freely access the money on the adult ISA, as it does not have an age restriction like the Junior ISA has.
When account-users reach the age of 18, they can merge their Junior ISA Accounts (which automatically becomes a normal cash ISA as well) with the adult one, providing that one of them allows you to transfer.
What are different types of Junior ISA Accounts?
Just like with adult ISA accounts, there are two different types, Junior Cash ISA Accounts and Junior Stocks and Shares ISA Accounts.
- Junior Cash ISA Account: Junior Cash ISA’s are simply tax free savings accounts, where the interest of the money put into the account is not taxed. Provided you are using a UK regulated provider, the money is safe and you will receive a defined interest rate.
- Junior Stocks and Shares ISA Account: Unlike with the Junior Cash ISA, the performance of the investment account depends on the performance of the stocks and shares you choose to invest in. Due to inflation, the investment Junior ISA is likely to grow more substantially than a Cash ISA, if your stocks and shares perform well. At the same time you are running a greater risk of losing parts of or all your money due to the general risk of investments. In consequence, the younger the child, the more likely it is that the investment ISA is the better choice. However, due to the unpredictability of the stock market, it might be always be advisable to split your risks between a Cash ISA and an Investment ISA.
The rules allow a saver to open one cash ISA and one investment ISA per tax year, but you are allowed to transfer the money to a different account at any time. If you decide to move money from a cash ISA to an investment ISA, you can still keep this account.
However, if you move money from one cash ISA to another (or from one investment ISA to another), the original one will be closed, so you will only keep one. Unlike with adult ISA accounts, where you can only put a predetermined part of the sum in cash, Junior ISAs allow you to decide about the entire allowance; hence you could put all of the £4000 into your cash ISA, or use parts of it for investments.
Tips for choosing a Junior ISA Account for your child
In the UK, everyone under the age of 65 is allowed to earn an annual amount of £10,000 before paying tax, hence not all children have to pay tax on their savings if they do not reach this amount. Instead of opening a Junior ISA account, it is thus also possible to fill in an R85 tax form and if the savings remain under this sum any normal savings account will remain tax free.
If parents have a specific plan in mind, such as saving for a university fund, a Junior ISA might thus not be the best option.
At the moment the child turns 18, it gains full authority over the amount of money in the Junior ISA account and hence can choose what to use this money for.
On the other hand this can be beneficial, as the child learns from an early stage to take responsibility over the own finances. It is thus a good idea upon opening a Junior ISA for an older child, to include the child in all steps of the decision-making process and pave the way for an early financial education.