Saving for your child’s future is a no-brainer, right? If you can afford to put a little extra away each month, it will soon add up and give you peace of mind that they’ll have a financial safety net when they go out into the big bad world, or a solid foundation to continue saving for a big purchase like their own home.
But how should you go about it? Well, opening a Junior ISA is a great option, and here we explain everything you need to know.
What is a Junior ISA?
A Junior ISA (Junior Individual Savings Account or “JISA”) is a type of long-term, tax-free savings or investment account for children. It was launched to encourage families to save for their children’s futures.
Any money you save or invest in a Junior ISA is essentially locked away until your kid’s 18th birthday, after which point it becomes theirs. We’re thinking of a nice deposit for a home, or a good base to continue saving.
Who can open a Junior ISA? Who can pay money into it?
To open a Junior ISA, your child has to be under 18 and living in the UK.
You can only open an ISA on their behalf if you’re their parent or legal guardian and a UK resident.
When your child turns sweet 16, they can apply to manage their own Junior ISA — but they can’t withdraw the money until they’re 18.
Anyone can pay money into your child’s ISA, including parents, grandparents, family and friends. The money in the Junior ISA then belongs to your child.
What are the different types of Junior ISA?
There are a couple of different types of Junior ISA available. Your child can have a Cash Junior ISA or a Stocks & Shares Junior ISA.
Cash Junior ISA
This is exactly like a regular savings account you’ll probably be familiar with – you simply add cash and get interest in return. Interest rates are super low at the moment, so expect around 2% per year. You won’t pay any tax on the interest at all. And once your child turns 18, it will automatically turn into a regular Cash ISA in their name.
Stocks & Shares Junior ISA
This is where your kids' savings will really grow. When you save in a Stocks & Shares Junior ISA, your ISA provider (the company that looks after the ISA) will work with an investment fund (the experts who manage investments) to grow your kids' savings safely over time – with the aim for your kid to be rolling in it by the time they’re 18 – with all the money being completely tax-free!
It will then turn into a regular Stocks & Shares ISA when they're 18.
It’s far simpler and safer than it sounds – you don’t actually need to do anything, it’s all handled for you by the experts, and they’ll invest in things such as:
- Stocks & shares: This is where you buy an ownership stake in a business, called a share, and the value of the share increases as the value of the company increases, when the company does well. These are traded on stock exchanges all over the world.
- Bonds: a bond is like loaning your money to a company or government, where you receive interest payments on the amount you’ve lent. The bond has a date when they mature, which is when the loan amount will be repaid (plus interest).
- Exchange-traded funds (ETFs): A fund is a group of investments or shares grouped together, for instance the top 100 companies in the UK. You can then simply buy a share of the fund rather than all the individual companies. This can be safer than an individual share as your money is spread across a wide range of companies. The shares in these funds are traded on a stock exchange too.
Should I pick a Cash Junior ISA or a Stocks & Shares Junior ISA?
Let’s assume you are opening a Junior ISA for your new born baby, or they’re just a few years old. That means you’ve got years and years of saving and the money growing until they are 18 – when they get the money themselves. Can you guess the best for long term saving?
Yep, you guessed it – a Stocks and Shares Junior ISA is by far the best way to save for the future. As a rule of thumb, you could expect your savings to increase by 8% per year on average – and the best bit, the interest compounds. This means your interest is used to make more money, and the interest from that makes even more money. You get the idea. Over 18 years this builds up to an impressive amount!
With a Cash Junior ISA, you’ll get a set interest rate each year, which currently would be around 1-2% depending on the ISA provider – quite a lot lower than the 8% average of a Stocks and Shares ISA.
If your child is a lot older, around 15-17, you could consider a Cash Junior ISA. Why? Over a short time frame, saving in a Stocks & Shares Junior ISA could end up losing money depending on how the investments perform.
Although saying that, you could also make a lot of money too. The important thing is to have a long term view, and ideally your child would keep investing for their future after they turn 18, and not immediately spend it all on a fast car!
So, for long term savings go for a Stocks and Shares Junior ISA – your child will end up with a lot more money this way.
For short term savings, 3 years or less, and if you have a view to spend the money immediately when they're 18, you could go for a Cash Junior ISA.
How to open a Junior ISA
The good news is, whichever type of Junior ISA you choose, it’s super easy to open one. And it usually doesn’t take that long, either. Not sure where to look? Here are our recommendations for each type of Junior ISA...