We all understand how important it is to save. If you have children, using your Child ISA allowance – officially known as the Junior ISA (JISA) allowance – is a great way to get your child on the savings ladder, even though it’s not the one. If you would like to know more about how these ISAs work and what the rules are, please read on.
What are ISAs?
The initials ISA stand for “Individual Saving Account,” and these products are what are known as “tax wrappers.” They provide an “envelope” in which you can invest, watch your investment grow tax-free, and make withdrawals without having to pay any income tax. There are six core types of ISA:
- Cash ISA
- Help to Buy ISA
- Innovative Finance ISA
- Junior ISA
- Lifetime ISA
- Stocks and Shares ISA
You can set up any one or more of these ISAs via a bank, building society, NSI, wealth specialist companies, and investment platforms. In this article, we’ll look at setting up an ISA for a child or young person and the Junior ISA allowance itself. But let’s begin by looking at who a Junior ISA can be set up for.
Eligibility for a Junior ISA
To be eligible to have a Junior ISA set up for them, the child in question must be under the age of 18 and must be a resident here in the UK. Although the child or young person in question cannot access the money until the age of 18, they can manage the account from the age of 16.
But who is allowed to set up a JISA?
Who can set up a Junior ISA?
The only people who can set up Junior ISAs are the parents or legal guardians of the child or children. Not only will it benefit the youngster, but it also allows the person setting up the account to use their annual Junior ISA allowance, and it is a case of use it or lose it.
What is the Junior ISA allowance, and how much can you invest each year?
All adult UK residents have a personal, annual, ISA allowance of £20,000 per annum. It applies to all ISAs (except the Junior ISA), but the £20K is one total across all. For the current tax year, The Junior JISA allowance is £9,000, meaning that anyone setting one up would have £11,000 of their annual allowance left over, which could be invested in one or more of the other types of ISA.
As mentioned at the beginning of the article, if you don’t use any or all of your annual allowance by the end of the tax year, it is lost. It includes the £9,000 JISA allowance too.
Although any money that is invested into a child ISA belongs to the nominated child, they cannot access it until they turn 18. At that stage, it automatically turns into an adult ISA. The young person can then either leave the money where it is, reinvest, or take it out and spend it.
If someone’s investment takes the total over the £9,000 child ISA allowance annual total, the excess is put into a savings account in trust. It cannot be returned to the investor.
The types of Junior ISAs
We have already mentioned the fact that there are six types of ISA. One of which is the Junior ISA. But there are also two types of JISAs which are:
- The Junior Cash ISA
- The Junior Stocks and Shares ISA
Both are tax-efficient savings vehicles, and the Junior ISA allowance is £9,000 per annum on either, or across the two. Any child under the age of 18 and resident here in the UK is allowed one Junior Cash ISA, and one Junior Stocks and Shares ISA.
Risk versus reward
The big difference between the two types of ISA is return and risk. Whereas the money invested in a Cash ISA is extremely safe, any money invested in a Stocks and Shares or Investment ISA is subject to fluctuations in the markets.
However, the returns that the account could earn when you use your Junior Stocks and Shares ISA allowance to the full could be significantly higher than if the funds were to be invested in a Junior Cash ISA. It all comes down to the risk versus reward argument.
If you take a look at our piece exploring the “Cash ISA vs Stocks and Shares ISA: A 10-year study”, it shows that the average returns on Cash ISAs are often well below their Stocks and Shares counterparts. Naturally, past performance is no indicator of future returns, but there are potential opportunities for savers.
Is a Junior ISA Safe?
You cannot escape the fact that there is an element of risk when you choose to invest your Junior JISA allowance in a Stocks and Shares ISA. You can lose money as well as make it. But what are the risks, and how high are they?
The risks can be broken down into two categories. One is what types of stocks and shares are bought, and the other is the term, or how long the ISA runs for.
Using your Child ISA allowance to buy a diverse range of stocks and shares is one answer. Risk is heightened when all of the shares are in one company or geography. If either goes down, so too does the value of the portfolio. But, crucially, holding a diverse portfolio can help counteract this type of risk.
The other type of risk – the term, becomes relevant when the child wants to access the money. If it is at a time when the market is depressed, there could be losses. That is why Stocks and Shares ISAs are only recommended as long-term investments (by long-term, we mean five years or more).
Generally speaking, a Junior ISA is probably going to be a long-term investment, which greatly reduces this category of risk.
Which type of Junior ISA is right for your child?
The choice of what to do with your Junior ISA allowance depends entirely on the products that have been set up. Are we talking about a Junior Cash ISA or a Junior Stocks and shares ISA? If only one type has been set up, you have no choice but to go with that one if you want to set money aside for the child’s future.
Perhaps the right thing to do is to set up both types of ISA. That would then give you a choice of what to do with your current Junior Isa allowance, and you might decide to split it 50/50 between the two.
Converting child trust funds into a Junior ISA
In 2015, the UK government began allowing people to convert Child Trust Funds (CTFs) into Junior ISAs. Anyone can now either continue to pay funds into a current CTF, up to a maximum of £4,368 per annum, change to a new CTF provider, or transfer the fund to a Junior ISA.
Making the most out of your Junior ISA allowance 2021/22
Every adult UK resident has a £9,000 Junior ISA allowance they can access every year. If you have young children in your family and you want to invest money they can access when they are 18, a Stocks and Shares ISA will produce significantly higher returns than a Junior Cash ISA. It is the best way of ensuring the savings are not eroded by inflation.
However, you have to be prepared to accept a certain amount of risk. If you are in any doubt, or you simply cannot make up your mind on how to make best use of your JISA allowance, you may benefit from a discussion with a wealth management specialist.