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Best ISAs for a baby: top children’s ISA savings accounts

As parents and guardians of babies and young children, we aspire to help our little ones grow into caring, responsible, and financially stable adults, and saving for your child is an integral part of that process. Therefore, we address questions about when you should start saving and what savings vehicle you should use here in this article.

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Can Babies have ISAs?

One of the best savings vehicles available here in the UK right now is the Individual Savings Account or ISA for short. There are four basic types of ISA – a Cash ISA, a Stocks and Shares or Investment ISA, an Innovative Finance ISA, and a Lifetime ISA. But the Cash ISAs and Stocks and Shares ISAs also have variants for children by way of a Stocks and Shares Junior ISA and a Cash Junior ISA.

The good news is that you can open both types of Junior ISA (JISA) for children up to the age of 16, so you can start as early as you like. Then, after 16, a child can open one for themselves.

Starting one just after the baby is born is the best option because the longer the investment runs, the better. That will, of course, lead us to the question of which is the best ISA for a baby? But, let’s not get ahead of ourselves. Let’s start with who can open an ISA for a baby or child:

Who Can Open a Junior ISA for Babies

Not just anyone can open a Junior ISA for a child or baby. You must either be one of the child’s parents or legal guardians. Not even grandparents can open a Junior ISA, although, like anyone, they can contribute to them once they have been opened.

You want to put as much aside for your child as possible, but financial planning is essential. You must first make sure you are in a position to do so.

For Junior ISA contributions, the maximum annual Junior ISA allowance is £9,000. To avoid any doubt, this is the total amount that can be contributed during a tax year, whether it’s just one person or several who donate. But what is the best ISA for a baby? Which should you choose – Cash or Stocks and Shares? Before we answer that, let’s look at what Junior ISA accounts are.

The Junior ISA Explained

Junior ISAs are long-term savings accounts set up via Junior ISA providers by parents or guardians for their children’s future. Both Junior Cash ISAs and Junior Stocks and Shares ISAs, like all forms of ISAs, are known as tax wrappers. It means that when the child in question reaches the age of 18, the age at which they can withdraw their funds, they won’t be liable for either income or capital gains tax.

To qualify for a Junior ISA, which many people believe to be the best child savings account available, a child must be under 18 years old, a resident in the UK, or be the child of a Crown employee serving overseas.

When considering the best ISA accounts for babies, a Stocks and Shares JISA offers potentially more significant returns in the long term, but you have to bear in mind that the value of investments can depreciate as well as appreciate. On the other hand, cash is more secure but earns lower returns, and its value can erode due to inflation. The rate of return is a dilemma when considering the best children’s ISA savings accounts.

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Which is Better – A Junior ISA or a Child Trust Fund?

The Child Trust Fund (CTF) scheme was closed to new applicants in 2011. The Junior ISA scheme replaced it. If you still have an active CTF started before that date, you can continue making payments of £9,000 per annum into it. As with JISAs, when the child reaches 16, they can take over the management of the fund and withdraw money when they reach their 18th birthday.

On the downside, the £50 – £500 the government contributed to each CTF also ceased with the scheme’s closure, and it does not apply to Junior ISAs.

On the upside, whereas a child could only have one type of CFT (Cash or Stocks and Shares), not both, a child can have both types of Junior ISA, but no more than one of each. The other advantage is that Junior ISAs tend to offer more choices and better value than CTFs.

If your little one already has a Child Trust Fund (CTF), you can only open a JISA if you transfer the money in the CTF into a Junior ISA as part of the JISA application process.

The Child Trust Fund vs Junior ISA comparison is a close one. But if you want to switch your child’s savings account across, you can do so.

The Best Junior ISAs for Babies in the UK

The question of the best ISA for a baby comes down to your attitude towards risk. While cash savings are potentially safer than savings in the stock market, the maximum amount of interest a Junior or Adult Cash ISA earns is likely to earn is no more than 2.5%, whereas Junior or Adult ISAs invested in stocks and shares is expected to earn significantly more.

A Cash ISA vs Stocks and Shares ISA study conducted by Moneyfarm concluded that the annual return on bank accounts and Cash ISAs was 1.21% as opposed to 9.64% on Stocks and Shares ISAs. Bearing this in mind, the best ISA account for a baby has to be a Stocks and Shares JISA.

Both types of Junior ISAs are tax-free savings accounts, and both allow the child or young person to access the money when they turn 18.

You can open both types of JISA for your child, but only one in the same tax year. The best ISA for baby UK parents and guardians decide on soon after a baby is born is a Cash ISA, and that is because Cash ISAs are safer.

But often, after a few years, when you see interest rates soaring and outstripping the potential returns, you might decide to take out a Junior Stocks and Shares ISA. That way, the child has both types of ISAs. Alternatively, you might decide on an ISA transfer, closing the Cash ISA down and moving the funds into an Investment ISA.

There is no doubt that one of the best kids investment vehicles around is the Junior ISA. You just have to assess your attitude towards risk and choose – a Cash JISA or a Stocks and Shares JISA.

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