How do junior ISAs work?
A Junior ISA is a way to gift a child tax-free savings that they can access as an adult.
It works like this: every year you can give a child in the UK under 18 years old thousands of pounds in a special Junior Investment Saving Account (ISA). The ISA invests that money for you in one of two ways:
- Junior cash ISA. The cash-only account accumulates interest each year. Interest rates, depending on the provider are between 1.5% and 3.25%.
- Junior stocks and shares ISA. Your cash is invested in stocks and bonds, and the value of investments can grow and earn dividends. While the value of investments can rise significantly, there is also the risk of a negative return.
Junior ISA rules say a parent or guardian can set up one or both types of ISA for a child. When the child turns 18, the child can then withdraw money from the Junior ISA, including any interest, profits or dividends – all tax free.
Any adult can add money to the Junior ISA, although you do not want to go over the annual limit. The Junior ISA limit can change each tax year. In the 2020-2021 tax year, the limit is £9,000 per child.
Why open a Junior ISA?
The main advantage of setting up a Junior ISA for your child is that it is tax-efficient - no tax is paid on returns.
The other advantage is that it is accessible at an opportune time. For many 18-year olds, this can be an important and much-appreciated source of savings. This can be useful for university and setting up their own lives outside of the family home.
For parents and family, a Junior ISA is also a sensible place to store leftover birthday money and donations from relatives. If that money were stored in cash, or in a savings or checking account, it would be unlikely to significantly grow in value over time.
Another reason to consider a Junior ISA is for its education potential. You can use it as a way to teach kids about money and saving for their future, and open discussions about plans and budgeting.
Managing a Junior ISA
When you select a Junior ISA, you put the ongoing management of the funds with a financial institution. They will charge a small annual management fee, which will vary by firm and by how much is invested in the account. You can view some rates here.
If you set up a Junior ISA, you will also want to manage the amount invested each year. There are a few things you can do.
- Budget. Set aside money each month to invest in the account. A free service like Money Dashboard can help you budget and plan for these savings.
- Monitor progress. You will have visibility on the performance of the fund through the investment management company managing the fund. And if you set up a Nutmeg junior ISA, you can track it via the Money Dashboard Neon app too.
Know your options. If you are unhappy with performance, it is free and fairly painless to transfer a Junior ISA from one investment management firm to another. Although it’s good to remember that markets fluctuate all the time. Junior ISAs are long-term investments and it’s normal to experience some degree of booms and dips in value along the way.