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Top Junior ISAs 3.25% tax-free kids' savings

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Junior ISAs for under 18sJunior 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.

What is a junior ISA?

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.^ million children are eligible

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

    BUT...
  • 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...

A practical ISA analogy

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.

Important facts

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?

Question oneThe 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.

    Junior ISAs grow into adult ones 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?

Question twoSo 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.

  • You have to lock your cash away
  • 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.

So overall, you need to balance any gain from the tax boost against the limits a junior ISA will place on the cash. Think carefully about what your aim is when putting the money away.

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.

Save or invest?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.

Nationwide
  • 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.

Coventry
  • 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 is a clean rate account, with no short-term bonus, paying 3.25% AER variable.

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.

MansfieldBS
  • 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.

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.

Halifax
  • 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 decent 1.5% AER - 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.

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