Junior Isas: a tax-free fund for your kids
Junior Isas are a useful way to save for your children. Just remember that they’ll take charge of the money when they hit 18.
Junior Isas (or Jisas) celebrated their tenth birthday last year. Over the past decade, boosts to the deposit limit combined with (surprisingly) generous interest rates and healthy investment returns have allowed families to build sizeable nest eggs for their children.
“Many things haven’t changed in the past ten years since the Jisa was launched – back in 2011 Adele was topping the charts, Kim Kardashian was getting divorced and we were all experiencing rising inflation and continual talk of an interest-rate hike. However, parents who were savvy enough to use a Jisa to start a savings pot for their children could have built up almost £75,000 for their child during that decade,” says Laura Suter at AJ Bell.
How Jisas work
A Jisa is very similar to an adult Isa. It acts as a protective wrapper to shield your savings from tax – money held within a Jisa can grow free from income tax, capital-gains tax and dividend tax. This may seem irrelevant for a child, but the tax office doesn’t treat under-18s any differently to adults when it comes to tax. If their money grows beyond the tax allowances, it is taxed in exactly the same way.
It is also worth noting that if parents put money into a standard children’s savings account and it makes more than £100 of interest a year, it is taxed at the parent’s income-tax rate. So it is worth considering tucking it into a Jisa for simplicity, if nothing else.
There are further attractions with a Jisa. When your child turns 18 their account will automatically convert into an adult Isa. That means the nest egg you’ve built is protected from tax even when your child reaches an age where they’re likely to have to start paying some.
You also have the choice between a cash or investment account, just as with an adult Isa. However, this is where the key differences start to become clear; the annual limits and the accessibility are very different. You can deposit up to £9,000 a year into a Jisa. The money cannot then be taken out – it is locked away until the child turns 18, at which point it is entirely under the control of the child in question. Given these two factors, it is vital to ensure that your own finances are in order and that you won’t need the money before you save it on your child’s behalf. You may be sure that your obedient four-year-old won’t blow the money on a massive party rather than university living costs when they turn 18 – but it’s prudent to consider what might happen if they did.
Take advantage of time
On the upside, the fact that the money is locked away for such a long time means it could well grow into a significant sum. “For a child born today,” says Suter, “if you put away the full £9,000 a year and assume 5% growth, you could have more than £265,000 by their 18th birthday – definitely a birthday gift your child will thank you for.”
Annual growth of 5% may sound like a dream when you consider the rates offered on traditional accounts at the moment, but to be fair, interest rates on cash Jisas are far more generous than on mainstream accounts. The best-buy option is from The Family Building Society, which pays 2.4%. However, you will probably get a better return if you opt for an investment Jisa. “While stockmarkets may be volatile on a day-to-day basis, a glance at history shows that they have a knack of delivering inflation-beating returns over long periods of time,” says Myron Jobson at Interactive Investor. “Most Jisas are inherently going to be very long term because they can’t be accessed until the child is 18, so there is ample time for short-term bumps in stockmarkets to be ironed out.”
The best cash Jisa rates and investment platforms
As noted above, the best cash Jisa rate is 2.4% from The Family Building Society. This account can only be opened in branch or by post. For a cash Jisa that can be opened and managed online, Tesco Bank offers the best rate at 2.25%.
Both accounts accept transfers from other Jisas, but given that interest rates have fallen, check you aren’t getting a better rate on your existing Jisa before transferring.
There is plenty of choice on investment Jisas. Finding the right platform will depend on what you want to invest in and whether you want to build your own portfolio or not.
Fidelity doesn’t charge a platform fee on its Jisas, so it offers some of the cheapest options. Its Fidelity Personal Investing Cost Focus allows you to select from five different ready-made portfolios, with the preferred option depending on how much risk you want to take. This is a good choice if you are new to investing and don’t want to worry about picking individual investments and balancing a portfolio. The average annual costs on the investments themselves are 0.32%. If you’d rather pick your own funds Fidelity’s self-invested Jisa offers free fund trading, but share dealing costs £10 a trade.
For those who want to invest in shares, Hargreaves Lansdown’s Jisa has trading fees of £5.95 and a maximum platform fee of 0.45%. Interactive Investor offers a free Jisa as long as you hold an adult account and free investing via its regular investing service.
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