As this month marks the 10th anniversary of Junior Isas, we take a look at how they work and whether they’re the best way to save for children.
According to the latest HMRC statistics, the number of parents choosing Junior Isas for their children is growing. More than 1m Junior Isa accounts were paid into in 2019-20; an increase of more than 7% from 2018-19.
The latest data shows, 706,000 accounts were cash Isas, while 317,000 were stocks and shares Junior Isas.
Here, Which? reveals seven things you need to know about Junior Isas – whether you’ve already opened one for your kids, or you’re considering it for the future.
1. Junior Isas replaced Child Trust Funds
Junior Isas were launched on 1 November 2011 to replace Child Trust Funds, which were government-backed savings products for children born between 1 September 2002 and 2 January 2011.
Now closed to new savers, those who already have child trust funds have the option to move them to Junior Isas, which tend to have higher interest rates and more product choices.
If you want to make the switch, you can just fill out a Junior Isa transfer form on your child’s behalf, with their details and information about their child trust fund. The Junior Isa provider will then carry out the switch for you, which should be completed in 30 days.
- Find out more: child trust funds
2. They’re a tax-free savings option
One major benefit to Junior Isas is that all interest earned in the accounts remains tax-free. This is important if you’re saving over a long period of time, due to the effect of compound interest and/or investment growth.
Children aren’t exempt from tax; more often than not, they won’t face any tax bills as they don’t tend to have any income other than savings accounts, and it’s unlikely the annual income from these would exceed the personal savings allowance, let alone their full personal income tax allowance (£12,570 in 2021-22).
But when it comes to saving for children, it’s not just the child’s potential tax liability that needs to be considered. There’s also the £100 savings rule that many parents aren’t aware of.
If the interest on the savings you deposit into a child’s savings account exceeds £100 a year (or £200 if both parents deposit money), this interest will be added to your savings income. This could mean your savings interest exceeds your personal savings allowance, and may be taxable.
The £100 interest limit applies to gifts from parents, step-parents or guardians – not other family members or friends.
This does not apply to interest earned in a Junior Isa.
- Find out more: children and income tax
3. There are options for cash, and stocks and shares
Junior Isas are available as cash Isas, where the money is held as cash by a bank or building society, and paid a variable interest rate. At the time of writing, there are 34 Junior cash Isas on the market, and the highest rate available for a Junior cash Isa is 2.5% AER – but we update our guide with the top-rate accounts on a monthly basis.
Minimum deposit requirements range from £1 to £500; the majority of accounts allow you to open with just £1.
Junior stocks and shares Isas work in much the same way as adult stocks and shares Isas. Some are provided by investment platforms, but it’s also possible to get them through big banks – for instance, NatWest launched its own Junior stocks and shares Isa in June this year.
As with any other investment, there’s risk involved. This means the value of your child’s money can go up as well as down. However, saving for your child over a number of years does even out this risk.
- Find out more: best Junior cash Isas
4. You can only deposit up to £9,000 a year
The maximum amount that can be deposited into a Junior Isa in 2021-22 is £9,000; this was the same in 2020-21.
A child is only allowed to have one Junior cash Isa, and one Junior stocks and shares Isa open in their name. If you want to take advantage of a better rate or account elsewhere, you’d have to transfer the full balance of an existing Isa in order to switch.
If you’ve opened both types of Junior Isa for your child, the £9,000 deposit limit counts across both accounts, but you can split this however you like.
For instance, you could deposit all £9,000 into just the cash Junior Isa in one tax year, or choose to split the allowance with, say, £3,000 into the cash account, and £6,000 into the stocks and shares account.
- Find out more: Junior Isa rules and allowances
5. 16 and 17-year-olds can boost their Isa allowances
There’s a small savings loophole that those aged 16 and 17 can benefit from.
During these years, children are able to hold both a Junior Isa and an adult Isa. Used together, this means up to £29,000 can be deposited – £9,000 in a Junior Isa, and £20,000 in an adult Isa.
The interest this money earns would all be tax-free, so if it’s possible to use up these allowances for these years, it’s well worth doing.
- Find out more: cash Isa rules and allowances
6. There’s no access until a child reaches 18
Despite being able to open an adult Isa from 16, children will not be able to access or manage any of the money saved in a Junior Isa until they turn 18.
Parents or guardians cannot access the money, either.
At this point, the Junior Isa will change into an adult Isa, which can be managed as a normal account.
This suits some parents, who don’t want their child to splurge their savings until they reach adulthood. However, for those who want to teach their children how to manage their savings, this lack of access can be too prohibitive. In this case, a children’s savings account may be a better choice.
Note that once you turn 18, you’ll only be able to take advantage of the adult Isa allowance of £20,000 for the year.
- Find out more: how to find the best cash Isa
7. Anyone can contribute to a Junior Isa
While a child’s parent or guardian must be the one to open a Junior Isa on their behalf, anyone can contribute to the account.
This can be a good option for grandparents or friends who want to contribute towards the child’s future. Many children’s savings accounts, in contrast, do not offer this flexibility, and will only allow deposits to be made by parents or guardians.
To find out about other ways to save, see our dedicated guide on how to save for your children’s future.