If you are a parent, then your child is probably your greatest joy and your biggest worry. And, as you lie awake at night, it is possible that you have given some thought to their financial future. Maybe you have even opened a junior ISA to help prepare them for the tough financial environment they will have to navigate once they turn 18.
The cost of living has skyrocketed in recent years, making things difficult for the young and old alike. Interest rates have increased in tandem with inflation – and this has made it more challenging than ever for young people to get on the property ladder. On top of this, it is now estimated that younger savers will need a £1 million pension pot to fund a comfortable retirement.
If your child is still young, you are probably hoping that some of this volatility will have settled by the time they step into the adult world. However, if it hasn’t, then at least the funds in their junior ISA can help act as a buffer against life’s challenges. Perhaps the junior ISA can help fund their expenses while at university, or act as a deposit on a first home.
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As well as setting your children up well for the future, a junior ISA can help bring you, their parents, a little peace of mind. What you might not know, however, is that some life events can throw a child’s junior ISA into jeopardy. What are your rights if you get divorced or move abroad? What happens in the tragic event that a parent passes away? And who owns the junior ISA – the parent or the child?
These are the rules you should familiarise yourself with to protect your child’s investment.
What is a junior ISA?
A junior ISA is a tax-efficient wrapper for saving and investing on behalf of a child. You can stash up to £9,000 away each year, holding it in cash or investing it in the stock market. Any income and capital gains that you make will be shielded from the taxman.
Junior ISAs are a great tool for building wealth and should not be underestimated. Analysis from wealth manager Moneyfarm reveals that a junior stocks and shares ISA opened 18 years ago could be worth around £265,000 today. That’s assuming the parents maximised their child’s £9,000 ISA allowance each year.
If you are thinking about investing on your child’s behalf, take a look at our research on the best investment platforms for junior stocks and shares ISAs.
Who owns the junior ISA?
A junior ISA legally belongs to the child – so it won’t eat into your £20,000 ISA allowance each tax year. However, the bad news is that your child will be able to access the account as soon as they turn 18. This means there is nothing stopping them from spending the money irresponsibly, even if you would prefer them to keep it invested or save it for university costs or a house deposit.
Recent research from Interactive Investor suggests this is a concern for many people. A survey from the investment platform revealed that almost a third of parents haven’t told (or don’t plan to tell) their child that they have a junior ISA until they turn 18. Of those surveyed, 44% said that under-18s were “too young” for such discussions, while 13% said they feared their child would spend all the money once able to access the account.
Myron Jobson, senior personal financial analyst at Interactive Investor, describes building the ISA pot as only being “half the battle”. “Ensuring that the money is used in a responsible way is also challenging”, he adds. His advice is to turn the conversation into a learning opportunity. He suggests explaining the purpose of the ISA, and the advantages of saving and investing.
If your child is still young, you might think you can rest on your laurels until their eighteenth birthday approaches. However, unfortunately, a spend-thrift child isn’t the only risk you need to consider. Some life events, such as divorce or a move overseas, can prove disruptive to a junior ISA pot if they aren’t managed correctly. As such, it is important that you familiarise yourself with the rules and make adequate preparations.
What happens to my child’s junior ISA if I die?
It’s a horrible thing to think about, but an important question to consider. In the tragic event that a parent gets ill or passes away suddenly, the savings they have built can help look after their child once they are gone.
To take control of the junior ISA account, the child’s new legal guardian should contact the provider. Parents can specify a legal guardian for their child in their will in the event that they pass away before the child turns 18. This is just one of many reasons why writing a will is so important.
“Providers may have different procedures for this transition, but typically, they will require presentation of the death certificate for the previous registered contact”, explains Chris Rudden, head of investment consultants at Moneyfarm. “The process is simpler if the child is over the age of 16, as they can apply to take control of the account themselves.”
Is my child’s junior ISA at risk if I get divorced?
If you find yourself navigating divorce proceedings, it is important to tread carefully when it comes to your child’s junior ISA. While the account legally belongs to them, you need to make sure you are not using it to shield assets from your partner.
“When families go through a divorce, the fate of the JISA may become a point of contention, being overlooked or mismanaged”, Rudden explains. If one parent appears to be shielding assets from the other by stashing them in the child’s account, “there might be a situation where [the child’s assets…] could potentially become part of the combined financial assets”, he adds.
Can I pay into my child’s junior ISA if I move overseas?
The rules on junior ISAs and adult ISAs differ when it comes to overseas contributions – so make sure you are familiar with the details to avoid missing out.
If you move abroad, you are not allowed to continue contributing to an adult ISA from outside of the country. However, as long as your child was a UK resident when their junior ISA was opened, you can continue to save and invest on their behalf.
Just remember that your child’s junior ISA will automatically become an adult ISA as soon as they turn 18.
What happens to a child’s ISA if they are adopted?
If you adopt a child, it is possible that their birth parents or former legal guardians will have set up a junior ISA on their behalf. In this event, the junior ISA will be transferred into your care.
“The local authority should use the materials provided by The Share Foundation to ensure the new parent with Parental Responsibility for the child is aware of the JISA”, Rudden explains. This includes encouraging them to “take the necessary steps to assume control of the account”, he adds.
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