Junior ISAs are tax-free savings accounts that six million under-18s can save or invest up to £4,000 in this tax year. They then remain tax-free until their 18th birthday, and often beyond. The idea is to let them build up a nest egg to help in adult life.
This is a fully-updated guide to the best buy children's ISAs plus a detailed Q&A including "are junior ISAs worth it?" and how to choose between saving and investing.
In this guide
A junior ISA is a tax-efficient savings or investment wrapper aimed at encouraging families to save for their children's futures. Not every under-18 can get one though. Those who were eligible for the Child Trust Fund (the saving product it replaced) need to stick with that.
But - this is changing. In December 2013, the Government announced that people who took out a Child Trust Fund for their child will be able to move it to a Junior ISA from April 2015. See the CTF to J-ISAs news story, or the Child Trust Funds guide for more information.
For now, the following under-18s are eligible for a Junior ISA:
- Those born on or after 3 January 2011
- Those born before September 2002
- Those born between 1 Sep 2002 and 2 Jan 2011 can't get junior ISAs - they have Child Trust Funds.
In total, that's six million eligible children as of November 2011. Around 800,000 newborns each year will be able to get one too. The Government says a small number of people born between the CTF dates weren't eligible for them (for example, because they weren't UK citizens at the time) - they'll be able to get junior ISAs too.
There are two types of junior ISAs: a junior cash ISA, where the interest is not taxed, and a junior stocks and shares (investment) ISA, where the returns are mostly tax-free.
Unlike Child Trust Funds, the Government is not putting any money in. This is solely a tax-efficient savings vehicle for the child's money (or money given to them by parents). They can save or invest up to £4,000 in the 2014/2015 tax year. They can only access the money when they're 18, and at that point, the money belongs to them.
Junior ISAs are an extension of the existing adult tax free savings system (see the NISA guide). Once a child holding a junior ISA hits 18, it's automatically rolled over into a New ISA (or NISA) - safeguarding the tax-efficient benefit. The NISA works in exactly the same way, except that you can save a big £15,000 a year tax free
For over a decade, Martin has used his traditional cake analogy when explaining what ISAs really are. The same applies here too...
If you don't use it, you lose it
The tax year runs from each 6 April to the following 5 April, and it's important to remember you'll lose unused allowances (or portions of them) for good. However, once in the children's ISA wrapper, they remain efficient year after year.
Parents are in charge of the account, until at least age 16
Anyone with parental responsibility for the child can open an account. Usually these are the child's parents, but this could mean legal guardians such as grandparents if they are the main carers of the child. However, ANYONE is allowed to put money into the account.
Until the age of 16, parents are entirely in charge of paying money in, picking the providers and the type of junior ISA (cash or shares). At 16, the child has the opportunity to take charge of these decisions if they want to - but the money is still untouchable until they hit 18.
The limit increased to £4,000 on 1 July - so you can top up
Between 6 April and 30 June 2014, you could deposit £3,840 into a junior cash ISA or stocks & shares ISA. But from 1 July this limit increased by £160 to £4,000 - so if you've already paid in to a junior cash ISA since 6 April, you can just top it up to £4,000 providing the ISA provider lets you - which most junior ISA providers will.
You don't have to pay money in every year
There's no obligation to use your kids' junior ISA allowance, or to pay a minimum amount in each year to keep the account active.
Think of junior ISAs like a new motorway that's just opened. You've been given a new road to use - but if you don't have a car, or would rather use a different route, that's fine. It’s the same with junior ISAs. If you'd prefer to save in different products, or don't have spare cash, it's no problem - but the road will remain open for the foreseeable future, in case you change your mind.
Can I open multiple children's ISAs with different providers?
You can only open one junior cash ISA and one junior shares ISA per tax year. However, you are allowed to transfer your money to a different account at any time.
If moving from cash to investments, or vice versa, you can keep the original account as you'll still only have one of each. If moving to a different account within the cash ISA wrapper or within the investment ISA wrapper, the original account will close so you'll only have one.
In future tax years, you must either deposit new money in the same account or, if you choose another account, you'll need to transfer all your money from previous years to it.
Can I split the £4,000 allowance between junior cash ISA and junior stocks & shares ISA?
Yes, you can. You can only open one of each type of junior ISA but you can split the £4,000 allowance between them. So if you want to deposit £2,000 into the junior cash ISA and £2,000 in the junior stocks & shares ISA you can do this - providing you don't go over the £4,000 limit.
Savers can also transfer cash between the cash ISA and the stocks & shares ISA as many times as they like, with the only proviso that yearly deposits don't top £4,000.
Use it for financial education
If you are going to open a junior ISA for an older child, why not do the process with them, talking through the decisions? It's a great form of practical financial education.
See Teen Cash Class guide for more ideas.
What happens when my kids turn 18?
Once the child turns 18, the junior ISA automatically rolls over into a normal adult NISA, and they will retain whatever split between cash and investments existed at that time.
From then on, the account holder will be able to add cash up to whatever the prevailing NISA allowance is at the time (currently £15,000/year). The £15,000 can be split however you chose to between a cash NISA and a stocks & shares NISA.
The interest rate (or investment types) the junior ISA will be rolled into is entirely up to your provider. There's no indication yet of what they'll do - whether they'll retain the same rate or switch it. So check the rate at the time, and if it's poor, remember you have a right to transfer it (see the NISA Transfer guide).
This could be pretty soon for teenagers approaching 18, so be on the ball and please let us know what adult NISA rate you get in the forum feedback discussion.
To make sure the adult NISA gets set up, the child should provide the bank with their National Insurance number, so normal NISA set-up procedures can be adhered to, before the adult NISA opens at age 18. See the Cash NISA Guide for full details of how they work.
Those aged 16 or 17 can have both a junior ISA AND an adult cash NISA
Junior ISAs create a slight anomaly when the child turns 16 - they can also open a normal adult NISA as well as a junior cash ISA. However, they cannot open an adult stocks & shares NISA.
So 16 and 17-year-olds can have a bigger tax-free savings allowance than any other group. They can save £15,000 in an adult cash NISA AND £4,000 in a junior ISA - a possible saving of £38,000 over two years tax free when they turn 18, and that's in addition to any tax free savings they had built up as a child.
If teenagers (or parents) have the cash to take advantage of this, first make sure they are getting the highest cash NISA rate they can - though remember again, any money in these will be the child's to do what they want with.
Then, at age 18, any normal cash NISAs opened can be merged with the ex-junior ISAs (which by then will have turned into adult NISAs), providing one of them accepts transfers in - see the Cash NISA Transfer guide for full details.
Not everyone should bother with junior ISAs
So the Government gives away this great strapping big tax-free allowance, yet MoneySavingExpert.com suggests it may not be worth it. What's going on?
Well, while we always say that an ISA is the first place you should save if you are a tax-paying adult (and provided you're debt-free - see Repay Debts With Savings), the truth is that children's ISAs are only of limited benefit, generally to more affluent families. So here are the two big questions to help you decide.
Question 1: Would your child pay tax on savings anyway?
The big sell of opening a junior cash ISA is the fact the interest is tax-free. This will often pay substantial dividends, provided the savings would've been taxed anyway. But...
- Most kids don't pay tax anyway.
Many people think all children don't pay tax. That isn't true. Everyone in the UK under 65 can earn up to £10,000 per year (whether wages or interest) before paying income tax. Yet most kids, barring Justin Bieber types, don't get anywhere near this. Therefore, by filling in an R85 form when any savings account's opened, the money will be paid tax-free.
- The two exceptions...
If a big chunk of their cash comes from parents
Money given to a child by a parent or step-parent which generates more than £100/year in interest will be paid at the parent's tax rate, so the £100 allowance is on a 'per child' basis, rather than a 'per parent' basis. Once the child earns more than £100 in interest, the whole lot is taxed at the parent's tax rate.
The aim's to stop parents using their kids' tax-free allowance for large savings, then taking the interest themselves. So if you're close to that limit or over it, a junior ISA is a way to keep earning tax-free interest.
However, this cap doesn't apply for money given by grandparents or aunts and uncles etc. Provided it's a genuine gift (don't try to cheat) it's all tax-free for kids who don't earn over £10,000 a year. For a full explanation, read the Children's Savings guide.
Saving for the long term - junior ISAs stay tax-free in adult life.
While children's savings may be tax-free now, interest will be taxed once your little one starts earning a salary, unless they move the money into an adult cash NISA.
Yet if those savings were in a junior ISA, it converts into a cash NISA once they hit 18. So even if they're earning (and paying tax) by then, the interest remains tax-free.
So, if money saved for your kid is bigger than the adult cash NISA allowance - currently £15,000, using a junior ISA now can give extra protection from the taxman.
Question 2: It's their cash - are you happy with letting go?
So at this point, you may be thinking: "I'm not sure my kids will pay tax, but it seems safer to assume they might, so I'll use a junior ISA." With a tax hat on, that’s sensible, but you must also factor in the following.
It's their money. At age 18, they can do what they want with the cash.
From the day the cash goes in a junior ISA, it's the child's money, not the parents'. So you must remember at age 18, whatever you've planned for the money - such as building a mortgage deposit for them - the money's actually entirely your child's, and they can do WHATEVER they want with it.
So while you may have a cute toddler now, they could grow up to be a rebellious 18-year-old. Even if that's just a phase, when the money in junior ISAs finally becomes accessible, on their 18th birthday, it becomes theirs to do as they will.
To take it to its extreme, here's a question Martin was asked: "Could I stop them if they wanted to buy drugs with it?" The answer is no.
So if you're saving for a university fund, for example, (see our Don't Pay Tuition Fees Upfront guide) there's a risk with using a children's ISA.
Carefully consider whether you want your child to have complete autonomy over all the cash you put in once they turn 18. Saving in your name, especially if you're not already using your own tax-free cash NISA, could be the safer option.
- The money is locked away.
This could be seen as a good or bad thing. Much like a pension, once the money is saved away in a junior ISA, that's it. Neither you nor your child can access it until they're 18 - except if he or she becomes terminally ill or dies.
Many parents may see this as a positive if they don't want their children to have access in the short term - or even stifles any temptation to use it yourself. The bad news is, it means if you're short of cash and need it, you can't take it.
- The junior ISA choice is limited
While junior ISAs have flexibility - you should usually be able to change from cash to shares without problem (and vice versa) - this is a fairly new product type, so the choice of savings and investments is fairly limited. Though the rates are fairly decent theres limited options to chose from.
To save or to invest?
Like normal adult NISAs, the yearly allowance can be used to save or invest, and you have a choice over how much of the £4,000 allowance you use in each.
You can put as little or as much of the allowance as you wish in each - so you could have the full amount in a junior cash ISA (which would mean being unable to invest) or you could put £2,000 in cash and the remaining £2,000 in stocks & shares, or you could have it all invested in a stocks and shares junior ISA. It's entirely up to you.
- Saving - junior cash ISAs. This is where you put the cash in what is quite simply a tax-free savings account. The money is completely safe (provided it’s a UK-regulated provider and you've no more than £85,000 with that financial institution) and you get a defined amount of interest. The only risk is the money won't grow as quickly as inflation.
See full junior cash ISA best buys below.
- Investing - junior stocks & shares ISAs. Here, your money depends on the performance of the stocks or shares you've invested in. If they do well, the ISA is likely to grow far more rapidly than a cash ISA. If they do badly you could lose some, or even all of the cash you originally deposited.
There's no easy way to decide, and no right or wrong answer, it's all about your attitude to risk - and also how old your child is.
The younger they are, the more likely it is that investing will beat saving, as over longer periods the stock market tends to outperform cash. Yet, of course, there's no guarantee.
If your child is close to 18, when the money can be used by them, you're more at risk of the vagaries of the stock market. So, if they want to cash it in but the market's just crashed, they'll incur a big loss.
Remember you have the option to use some cash for saving and some for investing, to spread the risk.
Looking to invest?
It's important to note MoneySavingExpert.com doesn't cover investments - it's not our field of expertise. Instead, if you're thinking of investing, these junior shares ISA guides may be useful: Hargreaves Lansdown (printable booklet), Citywire, The Telegraph.
BEST BUYS: 3.25% tax-free junior cash ISA
These are the current top-paying junior cash ISAs - though always check your local building society, it may have branch-only offers for local customers.
Top 'clean' (no bonus) rates
Nationwide, 3.25% AER Top online access junior ISA. Min deposit £1.
- Rate: 3.25% AER variable
- Min deposit: £1
- Interest paid: Annually
- Access: Online, branch or post.
- Safety: Shared £85,000 UK protection
The best junior ISA is from Nationwide - this is the account paying the top rate. It's 3.25% AER beats all adult cash NISAs on the market, so it's a good way for your kids to earn a decent whack of interest.
Although it’s a no-bonus account - meaning the rate could drop at any time - Nationwide promises to pay at least 1.15% AER until 31 Jan 2015. Keep an eye on it and be prepared to ditch and transfer if it does.
Nationwide shares its £85,000 FSCS protection with Derbyshire, Dunfermline and Cheshire Building Societies. See more information about the Savings Safety rules.
Coventry BS, 3.25% AER Top clean rate. Min deposit £1.
- Rate: 3.25% AER variable
- Min deposit: £1
- Interest paid: Annually on 30 September
- Access: Phone/branch/post
- Safety: Shared £85,000 UK protection
The Coventry Building Society Junior Cash ISA also pays a top rate of 3.25% AER variable. There's no bonus on the account which means the rate could drop at any time.
You can save from £1 up to the £4,000 allowance. The interest rate isn't fixed so it could change at any time - make sure you keep an eye on it and if the rate drops transfer the ISA. You can apply and manage the account by phone, branch or post.
Coventry BS shares its £85,000 FSCS protection with Stroud & Swindon Building Society. See more information about the Savings Safety rules.
Mansfield BS, 3.05% AER Min £1 deposit. Post or branch.
- Rate: 3.05% AER variable
- Min deposit: £1
- Interest paid: Annually on 5 April
- Access: Post or branch
- Safety: Full £85,000 UK protection
The Mansfield Building Society Junior Cash ISA pays 3.05% AER and has no short-term bonus.
You can start saving from £1 up to the £4,000 limit. There's no bonus on the account so the rate could change at any time - if it does make sure you transfer out to a better paying ISA. Applications can be made by post or in branch.
Mansfield Building Society has the full £85,000 FSCS protection. See more information about the Savings Safety rules.
Slight boost for Halifax (N)ISA customers
Halifax, 4% AER Min deposit £1. Branch only access, but open online.
- Rate: 4% AER variable
- Min deposit: £1
- Interest paid: Annually on 5 April
- Access: Branch, but can open online
- Safety: Shared £85,000 UK protection
The Halifax Junior Cash ISA pays 4% AER on all balances from £1, if the registered adult on the account also holds any Halifax (N)ISA or if the child is aged 16-17 when the account is opened.
The account can be opened online or in branch but after that, access is in branches only, so make sure there's one near you if you're going to need regular access.
If the balance of the registered adult NISA drops below £1, or for non-Halifax NISA customers, the account pays a clean rate of 3% AER. For adults, the NISA Saver Online pays a low 1.25% AER. It's not a top rate but see how it compares in the Top Cash NISA guide.
Halifax shares its £85,000 UK savings safety guarantee with the rest of the HBOS group. See more information about the Savings Safety rules.
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Can I switch providers to boost the rate?
With adult NISAs, if you want to boost the interest rate, you can do a NISA transfer to move savings between different banks (if the new one accepts transfers), and retain the tax-free status. However, if you'd rather leave the existing stash alone and just pay into a new NISA in a new tax year, that's okay too.
With junior ISAs, transfers are possible too. But the method is even more crucial...
To switch ISAs, you MUST do a proper transfer through your new provider, NOT just open a new account
This means you can't have more than one junior cash ISA open at once, and the same goes for junior shares ISAs. To improve your rate, you must fully transfer the account to your new provider, closing the old one in the process.
Providers aren't required to accept transfers in, so that'd just mean you can't move to them if you already have a junior ISA open. In truth, we're still waiting for the product offerings to take full shape, but once they do, it seems likely banks will want to tempt junior ISA cash from other providers, so accepting transfers in will be vital.