What are Junior ISAs?

We look at what Junior ISAs are and how they can help you to build a savings pot for your children

Girl watering a plant which is growing from a stack of coins
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A record one million Junior ISAs were paid into by generous relatives and friends during the 2019-2020 tax year, according to HM Revenue & Customs (HMRC).

The best Junior ISAs are a great way to save for a child in a tax-efficient way - and have grown in popularity since launching more than a decade ago to replace child trust funds.

Maike Currie, investment director at Fidelity International, says: “Junior ISAs are a handy way to save or invest for a child. They can also be used to help teach the child about money management, and could kick-start a positive savings habit.”

If you're looking to open a Junior ISA for your child, then here is everything you need to know.

What are the junior ISA rules and limits?

Similar to an adult ISA, there are two options for a Junior ISA: 

   -  Cash: Pays a fixed or variable amount of annual interest, with the rate varying between different providers.

   -  Stocks and shares: The money is invested in the stock market, and returns depend on how those investments perform.

There’s nothing to stop you paying into both types of Junior ISA. However, a child can only hold one of each type - one cash Junior ISA and one investment Junior ISA.

The maximum that can be paid into a child’s Junior ISAs each tax year is currently £9,000, but this allowance is spread across both versions of a junior ISA. You could contribute £5,000 to a cash Junior ISA and £4,000 into a stocks and shares Junior ISA for the same child in the same tax year, for example.

The £9,000 allowance is separate to the £20,000 allowance that adults have for their ISAs, so saving into your own ISA won’t impact the amount that you can put into your child’s junior ISA.

Crucially, the money inside the junior ISA belongs to the child and cannot be withdrawn until they turn 18, although children can take control of the account from age 16. 

Parents can move the Junior ISA to a different provider if they wish, for example, to get a better interest rate, or lower fees if it’s a stocks and shares one.

Who can get a junior ISA?

 Junior ISAs are available to all children under the age of 18 living in the UK, as long as they don’t already have a child trust fund.

If the child lives outside the UK, they can only get an account if the parent or carer is a Crown servant, such as in the UK’s armed forces or diplomatic service. 

Only parents can open an account for a child under 16, although anyone can pay money into it, including grandparents, aunts, uncles and godparents.

Teenagers aged between 16 or 17 are allowed to open their own Junior ISA.

Are junior ISAs a good way to save for children?

HMRC won’t take a slice of any interest paid on cash accounts, nor on any income, dividends or capital gains from an investment Junior ISA. The only tax you can’t avoid is stamp duty when buying shares.

Rates on cash Junior ISAs are often higher than those on adult cash ISAs or saving accounts. There is also lots of choice when it comes to stocks and shares Junior ISA providers; many offer a wide range of investments, and have low fees.

You can set up a standing order to transfer cash to a Junior ISA each month, and also let relatives and friends pay directly into the account too. 

Starting early with a Junior ISA will give the child the best chance of having a big sum of money by the time they reach adulthood. According to figures from investment platform AJ Bell, if you put away the full £9,000 a year and assume 5% growth in a stocks and shares junior ISA, then a baby born today could have more than £265,000 in their Junior ISA by the time they celebrate their 18th birthday.

What happens to a junior ISA when a child turns 18?

Money in a Junior ISA automatically transfers to the child at age 18, and they can save, invest - or spend - it as they please. 

The money could help them get on the property ladder, or provide a rainy day fund for emergencies. Alternatively, the teenager could use some of it towards a gap year after finishing school or college, or they might like to invest it or put it in a pension. As a result, talking to your child about the money being saved on their behalf, and how they might like to use it, is a good idea.

If you’d prefer to keep control of the money and choose when to hand it over to your child, you could open a children’s savings account or investment account instead.

Can you lose money in a JISA?

If you choose a cash junior ISA, you won’t lose money. As with a regular savings account, the ISA provider will pay regular interest on the balance, though the interest paid may not keep pace with inflation, meaning in real terms its value is eroded.

With a stocks and shares junior ISA, as with all investments, the balance can rise and fall in value. This will depend on which investments are held in the account, and how the markets are performing.

Despite the investment risk, children have time on their side, and over the long term, the stock market usually outperforms cash.

Chris Hood, investment expert at the insurer NFU Mutual, notes: “The majority of families play it safe when it comes to investing for children and keep the money in cash savings, but families who invested their junior ISAs in stocks and shares are likely to have made significantly better returns.”

Which type of junior ISA should I go for?

The answer depends on the age of the child, and your attitude to risk. A stocks and shares account is designed for long-term savings. Financial advisers typically recommend that the money is invested for at least five years, as you can ride out any volatility in the stock market and reduce the risk of losing money.

If you are opening an account for a baby, there is a potential investment timeframe of 18 years, so the chances of losses are reduced. Even at a later age, say six or seven, there is more than a decade to go until the money can be withdrawn, and any ups and downs in the market should be smoothed out, making a stocks and shares Junior ISA more appealing.

However, if your child is approaching adulthood and will need the money for upcoming costs such as university or a car, then a cash Junior ISA may be a better choice.

Where can I get a Junior ISA?

Cash Junior ISAs are available from banks and building societies, as well as other providers such as NS&I.

The top annual interest rate is currently 2.5%, offered by Dudley Building Society, according to financial website Moneyfacts, followed by 2.4% from Family Building Society.

Stocks and shares junior ISAs are run by investment providers such as Hargreaves Lansdown, Fidelity, AJ Bell, interactive investor, Vanguard and Nutmeg. 

There are usually several fees to pay. These can include a service charge from the provider for holding your account, often between 0.25% and 0.45% of the amount held in the ISA.

On top of this, there are ongoing fees, if you choose to invest in funds. These are set by the fund manager and start from as little as 0.05%.

Alternatively, you may prefer to hold company shares. In this case, you are likely to pay a flat fee every time you buy and sell shares.

When it comes to fees, every provider will have a different charging structure. But ideally you want to aim for ongoing fees of less than 1% a year. You don’t want higher-than-necessary costs to eat into your returns. 

If you are overwhelmed by the choice of investments, many providers offer ready-made portfolios with a simple fee structure. 

What if I have a child trust fund?

Child trust funds ran from 2002 until 2011. Like junior ISAs, both cash and investment options are available.

You can no longer apply for a child trust fund, but you may still be paying into one. You cannot have both a Junior ISA and a child trust fund, but you can transfer a child trust fund to a junior ISA.

This is worth doing, as interest rates are likely to be higher in a cash Junior ISA. If you have an investment child trust fund, fees are likely to be lower in a stocks and shares Junior ISA.

Ruth Emery

Ruth Emery is contributing editor at The Money Edit. Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.

With contributions from