The children are our future, and what better way to invest in the next generation than with a savings account. As it happens, there are special accounts designed specifically for this very purpose.

Junior ISAs are a tax-free way to invest in a child’s future, with the money safely locked away until their 18th birthday. But what is an ISA in the first place? How does a Junior ISA work, what different types are available, what rules and exclusions exist, and how much can you invest?

What does ISA stand for?

Before we look at Junior ISAs in detail, let’s take a quick step back and explain what an ISA is. After all, the banking world is sometimes full of confusing acronyms and jargon. Thankfully, this is one financial term that’s pretty easy to explain. 

ISA stands for Individual Savings Account and simply describes any cash savings or investment account that allows you to save tax-free. 

ISAs are offered by banks and building societies, as well as other providers such as insurers, asset managers, and National Savings and Investments (NS&I). There are five different adult types, and you can find out much more by visiting our what is an ISA page. 

What is a Junior ISA?

A Junior ISA is an Individual Savings Account created to help parents save for their children’s future. They’re long-term, tax-free savings accounts designed to keep money safe and help grow your investment until after a child turns 18. 

Each tax year, you can put up to £9,000 into a Junior ISA. This is the annual limit and is sometimes referred to as your ISA allowance. The government set the figure, and the current £9,000 limit is a significant jump from the previous allowance of £4,368.

On a child’s 18th birthday, the money is theirs. There are two main types of Junior ISA, as we will explain, and various conditions to be aware of. Still, generally, they represent an ideal way to save up for your children.

Who can open a Junior ISA?

Only a child’s parent or legal guardian can open a Junior ISA. Once the savings account has been opened, anyone can pay into it, including grandparents, friends, and even the child themselves. The child can also help manage the account from the age of 16, although they cannot withdraw any funds until their 18th birthday.

Who is eligible for a Junior ISA?

A child is eligible for a Junior ISA if they are:

  • A UK resident

  • Under 18

How does a Junior ISA work?

Here’s a simple rundown of how a Junior ISA works:

  • A parent or guardian opens a Junior ISA for their child; only the parent or legal guardian can do this

  • A Junior ISA can often be opened with just £1 in savings

  • A child must be under 18 when the account is opened

  • Anyone can pay into the account, including grandparents, family members, and friends, as long as the total remains under the annual limit

  • The Junior ISA limit is £9,000 for the tax year 2021/22 – this is the total that can be paid in tax-free

  • Money cannot be withdrawn from a Junior ISA until a child is over 18

  • At 16, a child can start managing their account

  • While aged 16 and 17, a child can benefit from a loophole that allows them to have both a Junior ISA and adult ISA at the same time, which means they can benefit from a combined ISA allowance of £29,000, made up of £20,000 from an adult ISA and £9,000 from a Junior ISA; read our ISA Allowances guide for more

  • All interest or investment gains on Junior ISAs are tax-free

  • You can only open 1 Junior cash ISA and one Junior stocks and shares ISA at any one time; we’ll have more on the differences between these two types of Junior ISA below

  • When a child turns 18, the account and total funds saved belong to them rather than their parent or legal guardian; they can withdraw the money or continue to save

  • If a child wants to keep the account open, it automatically becomes an adult ISA  

Reasons for opening a Junior ISA

As we’ve mentioned, the single biggest reason for setting up a Junior ISA is to put money aside for your child’s future. Whether it’s for university, driving lessons, their first home, a dream holiday, or something else, there are many reasons to build up funds for a child. Of course, there are many ways to save money, too, from putting cash in a jar to opening a regular savings account. So, what are the particular advantages of opening a Junior ISA? 

  • Junior ISAs are permanently tax-free – if parents or guardians put money for their child into an adult savings account, it would be taxed; a Junior ISA belongs to a child and is therefore tax-free

  • The money is locked away until after a child turns 18 to prevent the savings from being spent earlier

  • Some Junior ISAs can pay more interest than regular savings accounts

  • You can transfer an old child trust fund (CTF) into a Junior ISA

The 2 types of Junior ISA 

There are 2 main types of Junior ISA. These are: 

1. Junior Cash ISA

A Junior Cash ISA is effectively the same as the adult version. The main difference being that money cannot be withdrawn until a child is 18. 

A cash ISA is the same as a traditional bank or building society savings account. You put money in, and you get an agreed amount of interest. There is no real risk, and your savings are protected, but your money will not grow as fast as it would using some other accounts. 

The significant advantage of Junior cash ISAs is that neither you nor your child will have to pay tax on the interest earned on these savings. For more, read our cash ISAs guide.

2. Junior Stocks and Shares ISA

A Junior Stocks and Shares ISA is an investment savings account. You essentially invest in stocks and shares, and the success or failure of those determines how much money your savings make. Naturally, this comes with a risk of losses. 

In other words, the value of your savings can go up as well as down, but you could make much more money than you would through a traditional savings account where the gains are slow and steady. Profits earned by trading shares or bonds are also tax-free. 

Best Junior ISA

You may be wondering what the best Junior ISA is for your child. Should you go for a Cash Junior ISA or a Stocks and Shares ISA? As you may expect, there is no right or wrong answer to this. It’s more about finding the right option for you and your particular circumstances. 

The decision may also come down to how risk-averse (or alternatively, adventurous) you are with your savings and the age of your child. For example, suppose you’re setting up a Junior ISA for a young child with many years until they reach 18. In that case, investing in stocks and shares has a greater probability of paying more over a more extended period than slow and steady cash savings.  

The good news is, you can have both. Your child can have both one Junior Cash ISA and one Junior Stocks and Shares ISA at the same time. The only caveat is that they are still subject to the overall limit of £9,000 savings for the tax year. 

How much can you save in a Junior ISA?

There is an annual limit set for how much can be paid into a Junior ISA tax-free. In the 2021/22 tax year, that limit is £9,000 per year.

What happens if you pay more into a Junior ISA?

If you or your family and friends end up paying more into your child’s ISA than your annual limit, then this excess will be held in a savings account in trust for the child. It is never returned or refunded as it is considered a gift.

Junior ISA rates 

Money paid into a Junior ISA will earn interest without tax being deducted. Interest rates vary between providers, so be sure to shop around and compare products to find the best offers. At the time of writing, the best interest rates on Junior ISAs are between 2.25% and 2.5%. These are subject to change, so it’s worth checking the latest information when you’re ready to open an account. It is also possible to switch providers if you already have a Junior ISA and find a better rate elsewhere.

When can my child access their Junior ISA?

While young people can take over the management of a Junior ISA from the age of 16, they cannot withdraw any money – except in exceptional circumstances – until they are 18. 

However, from 16, a child can open a standard ISA themselves and save up to £20,000 without affecting their Junior ISA. This could be a smart move if you and your child have many savings to contribute. 

At 18, the money in the Junior ISA belongs to the child. It can either be withdrawn or rolled over into an adult ISA. From their 18th birthday, you will no longer have control over the Junior ISA; the child (now adult) will inherit both the money and full ownership of the account.   

Is a Junior ISA safe?

Suppose a Junior ISA is with an authorised UK bank or building society. In that case, money is protected up to £85,000 (or £170,000 for joint accounts) by the Financial Services Compensation Scheme (FSCS). This means it is very safe. 

This protection applies to both Junior cash ISAs and Junior stocks and shares ISAs. The latter is managed by authorised investment firms. Even if they go into default, the FSCS will award compensation up to £85,000 for each person and institution. 

With any savings or investment, it is always advisable to make sure your provider is authorised (such as the Prudential Regulation Authority for UK banks and building societies) to ensure your money is protected. 

Suppose you have a large amount of savings (above £85,000). In that case, it could be a good idea to divide your savings into several savings accounts. Then, each will individually benefit from FSCS protection. 

How to transfer a Junior ISA?

While a child can only have one Junior Cash ISA and one Junior Stocks and Shares ISA at a time, you can transfer money between these accounts whenever you like. 

For example, if the stock market is booming, you may want to put more money into stocks and shares. Similarly, if it looks like there might be a crash, then you might want to move your money into a more stable Junior Cash ISA. 

You can also switch providers if your Junior ISA is not performing as well as you hoped. So it’s worth closely monitoring your accounts if growing your savings is a priority.

It’s also possible to transfer old Child Trust Fund (CTF) accounts into your new Junior ISA. This has been possible since April 2015. CTFs were automatically opened by the government for any child born before 2 January 2011. While the government then paid £500 for every child, the interest rates were lower than Junior ISAs. So, it might be worth transferring your old CTF into a Junior ISA to benefit from the better interest rates. It’s a good idea to check with the provider you’re using to open your Junior ISA; not all accept CTF transfers.

Junior ISA products

There are many junior ISA products in the UK, from various providers, including banks, building societies, and other institutions, with both variable and fixed-rate deals available. It’s always worth shopping around and comparing rates to find the suitable Junior ISA for you.  

1. Halifax Junior ISA

Halifax bank – part of the Lloyds Banking Group – offers a Junior cash ISA with 2.00% tax-free/AER variable interest. You cannot have both a CTF (Child Trust Fund) and Junior Cash ISA with Halifax. If you want to open a Junior Cash ISA with this bank, you’ll need to transfer your CTF first. When a child turns 18, their account will change to a Halifax Instant ISA Saver.

2. Nationwide Junior ISA

Nationwide is one of the largest building societies in the world. At Nationwide, you can open a Smart Junior ISA for your child. Despite the different name, this is effectively a Junior Cash ISA. One of Nationwide’s Junior ISA benefits is that it includes online banking on the account, which is not always offered by all providers. 

Save money with a Junior ISA

Junior ISAs can be a great way of saving tax-free for your child’s future. They are relatively simple products to understand. Both types of Junior ISA have been designed for the specific purpose of safely and securely locking money away for a child until they turn 18. 

Whether you’re saving for their university, first home, driving lessons, or something else, a Junior ISA is a tried and trusted way to give the next generation a helping hand.

3 June 2021