Junior ISAs are tax-free savings accounts that six million under-18s can save or invest up to £3,720 in per 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 children's saving product it replaced) need to stick with that (see the Child Trust Funds guide).
That means the following under-18s are eligible:
- 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 ISA: 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 £3,720 per 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 ISA system (see the ISA guide). Once a child holding a junior ISA hits 18, it's automatically rolled over into a normal ISA - safeguarding the tax-efficient benefit.
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.
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 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.
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 they turn 18?
Once the child turns 18, the junior ISA automatically rolls over into a normal adult ISA, 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 ISA allowance is at the time (currently £11,520/year, of which £5,760 can be cash).
The interest rate (or investment types) the 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 ISA Transfer guide).
This could be pretty soon for teenagers approaching 18, so be on the ball and please let us know what adult ISA rate you get in the forum feedback discussion.
To make sure the adult ISA gets set up, the child should provide the bank with their National Insurance number, so normal ISA set-up procedures can be adhered to, before the adult ISA opens at age 18. See the Cash ISA Guide for full details of how they work.
Those aged 16-18 can have both a junior AND adult cash ISA
Junior ISAs create a slight anomaly. 16-year-olds can also open normal adult ISAs, so 16 to 18-year-olds can have a bigger tax-free savings allowance than any other group.
If teenagers (or parents) have the cash to take advantage of this, first make sure they are getting the highest cash ISA 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 ISAs opened can be merged with the ex-junior ISAs (which by then will have turned into adult ISAs), providing one of them accepts transfers in - see the Cash ISA Transfer guide for full details.
The junior ISA allowance rises with CPI inflation each year.
From April 2013, the junior ISA allowance will rise in line with the CPI inflation rate each year, just like the adult ISA allowance already does.
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 think saving is always good 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 £9,440 per year (whether wages or interest) before paying income tax. Yet most kids, barring Shirley Temple 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
If money given to a child by each parent generates more than £100/year in interest (so £200/year for a couple), then tax is paid at the parent's marginal 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, aunts, uncles or Bob from down the road. Provided it's a genuine gift (don't try to cheat) it's all tax-free for kids who don't earn over £9,440 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 ISA.
Yet if those savings were in a junior ISA, it converts into a cash ISA 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 ISA allowance (currently £5,720, but planned to increase each year), 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 ISA, 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 - this is a new product type, so the choice of savings and investments is currently limited. Put your money in one now, and you're restricting yourself somewhat.
To save or to invest?
Like normal ISAs, the yearly £3,720 allowance can be used to save or invest. Yet unlike normal ISAs, you have a choice over how much of that total allowance you use in each. You can put as little or as much of the £3,720 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).
With a normal ISA you can only use half (£5,760) of the £11,520 limit in cash.
- 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 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
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
- Safety: Shared £85,000 UK protection
The Coventry Building Society Junior Cash ISA is a clean rate account, with no short-term bonus, paying 3.25% AER variable. You can save from £1. Applications can be made by phone and access is 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 is a clean account which pays 3.05% AER with no short-term bonus. Start saving from £1. 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.
Top rates which include bonuses
Nationwide, 3.25% AER (under 16's only)Top online access junior ISA. Min deposit £1.
- Rate: 3.25% AER variable incl 1.15% fixed bonus until 31 Jan 2015
- Min deposit: £1
- Interest paid: Annually
- Access: Online, branch or post.
- Safety: Shared £85,000 UK protection
The top paying junior ISA is from Nationwide — it pays 3.25% AER on all balances from £1, and includes a fixed bonus of 1.15% until 31 January 2015. However, it's only for children aged under 16. You can open the account online, in branches or by phone.
Once the bonus ends, the interest will drop, so be sure to diarise to check the other best buys in January 2015, and transfer if you can up the rate.
Nationwide shares its £85,000 FSCS protection with Derbyshire, Dunfermline and Cheshire building societies. See more information about the Savings Safety rules.
Massive boost for Halifax ISA customers
Halifax, 6% AER Min deposit £1. Branch only access, but open online.
- Rate: 6% 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 6% AER on all balances from £1, if the registered adult on the account also holds any Halifax ISA or if the child is aged 16-17 when the account is opened.
The account can be opened online but after that, access is in branches only.
If the balance of the registered adult ISA drops below £1, or for non-Halifax ISA customers, the account pays a clean rate of 3% AER. For adults, the ISA Saver Online pays a fairly poor 1.35% AER - see how it compares in the Top Cash ISA 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 ISAs, if you want to boost the interest rate, you can do an ISA transfer to move savings between different banks (if the new one accepts transfers), and retain the tax-free boon. However, if you'd rather leave the existing stash alone and just pay into a new ISA 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.
You can shift between cash and shares whenever you like
Savers can move money between a junior cash ISA and junior shares ISA freely, and as many times as they like, with the only proviso that yearly deposits don't top £3,720.
This actually exceeds the flexibility that adult ISAs allow, where you can only move from cash to shares, and not vice versa (read the Full ISA Guide for more info).