Should you get your child a Jisa?

If you have any money left over once you’ve used up your tax-free allowances, you could consider a junior Isa for your children. But keep an eye on normal children’s savings accounts too.

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If you've already made the most of your own Isa and pension allowances you could consider sending some cash your children's way. The Junior Isa (Jisa) is a tax wrapper that allows adults to save money on behalf of a child under the age of 18 who lives in the UK. You can currently put up to £4,260 into a Jisa, but this figure will increase to £4,368 from 6 April.

As with adult Isas, the accounts can contain either cash or investments such as stocks and bonds: there are junior cash Isas and junior stocks and shares Isas. As with your Isa, the income and capital gains earned on these investments will not be taxed.

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In terms of logistics, only a child's parent or legal guardian can open the Jisa on their behalf. When the child turns 16, they will be able to take control of the Isa, but won't be able to withdraw money until they turn 18. From this point onwards, they get full control of the account, which is rolled over into an adult Isa.

A government guarantee

Money put into a cash Isa offered by a UK-regulated bank or building society will be protected up to the value of £85,000 by the Financial Services Compensation Scheme, while money put into an investment Isa will be protected up to £50,000. Your child can only have one cash Isa and one investment Isa at any one time.

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If you want to transfer between the two kinds of Isa, or from one provider to another, you can do so, but make sure you do this carefully so as not to lose the tax-free status on the money. Note that 16- and 17-year-olds can also put money into the adult equivalent of a cash Isa (though not an investment Isa), up to the standard allowance for an adult Isa. This allowance comes on top of the allowance allocated to their Jisa.

Although investing money on your child's behalf is generally a very good idea given the long time it will have to accumulate, only do so if you have the money to spare in the first place. There's no point putting money aside for your child's future if you haven't first put away enough for your retirement. For generous grandparents or other relatives and friends looking for ideas of what to get your child for various holidays or birthdays, you might want to suggest cash gifts towards their Jisa.

Remember that your child will gain full control of the account when they turn 18. While you would hope they wouldn't be so foolish as to blow it all on an expensive holiday, you might find it necessary to sit them down for a chat on how you expect the money to be put to use.

Is a children's savings account a better bet?

Finally, be aware that there is little point putting money into a cash Jisa if the rate your child will receive on it is lower than that offered by the top children's savings account. Given that your child will only pay tax if their income in the year is more than £17,850 (this includes their £11,850 personal allowance, £5,000 starting rate for savings and the £1,000 personal savings allowance), they'd have to have a lot of money in the savings account to risk breaching that amount. (In 2019-2020, the personal allowance will increase to £12,500, so children can earn up to £18,500.)

However, money put into a normal child's savings account that has come from each parent or step-parent (not grandparents or friends) can only earn £100 per year before tax falls due at the parent's tax rate. If the child earns more than this, and the parent has gone over their own personal savings allowance, all of the income will be taxed.

So in this situation, the money would have been better off in a Jisa. The system is designed to stop parents using their children's tax-free allowances to expand their own.

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The best cash Jisa rates on the market

The best rate you can get on a cash Jisa at present is 3.6% from the Coventry Building Society, according to personal-finance website Money Saving Expert. There is no minimum investment, but the rate is variable, so it could go down at any time.

The next- best rate is TSB's 3.25%, but note that this account can only be managed in-branch or over the phone, so it is hardly the most convenient offering.

Tesco Bank offers 3.15% and is a "good option if you want a big name' brand but aren't bothered about a big branch network", according to Money Saving Expert.

Meanwhile, you can currently earn 3.5% on up to £5,000 a year in a Nationwide Future Saver account (ie, not a Jisa), but you need a main Nationwide current account (or the interest paid is 2.5%), and you can only make one withdrawal per year.

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