Do you want your kids to get a head start in life and get them financially savvy at the same time? Of course you do. Junior ISAs (Individual Savings Accounts) are a mini-version of the normal ISAs that you might have heard about (or even invested in).
These savings accounts are a great way to keep the taxman at bay. Junior ISAs allow parents, grandparents and family friends to invest in cash, or stocks and shares on behalf of their children.
Why invest in your child’s future?
Spiralling university costs at the moment plus an uncertain housing market and not-so-bright household finances are worrying. Investing right now in your child’s tax free Junior ISA account will add up to a significant amount by the time they’re 18-years-old. The need for long-term savings for children has never been greater than right now.
How does it work?
All children under the age of 18 are eligible. Up to £3,720 can be invested per tax year until their 18th birthday. Once the child reaches 18, the Junior ISA becomes a normal adult ISA – so the savings remain tax free.
While Junior ISA money is locked away until your child is 18, bear in mind that when they do reach that age, the ISA money belongs to them. Hopefully by that time they would have been made financially aware by having an account they can call their own and would have been tracking its progress over the years.
All children under the age of 18 are eligible. Up to £3,720 can be invested per year – tax free
If the money is not going to be spent as soon as they reach the age of 18, you could transfer the Junior ISA money to a normal adult ISA. Get more information on adult ISAs how to transfer from one ISA to another. You would have not only saved for their future but also encouraged the saving habit, hopefully for the rest of their lives.
Give me an example!
Halifax created quite a stir last year by announcing their off the charts 6% Junior ISA, making it top the list of our best Junior ISAs (but to get this rate you or one of the parents must have a Halifax cash ISA).
Anyone that takes advantage of the £3,720 annual limit from birth at 6% would have a tax-free savings pot of £120, 079 when their Junior ISA transfers into an adult ISA. And this is just with a cash ISA. If you choose to split your yearly allowance of £3,720 into a Cash ISA and a Stocks and Shares Junior ISA, the savings pot might get even bigger.
What is the difference between a Cash Junior ISA and a Stocks and Shares Junior ISA?
A Cash Junior ISA is a simple tax-free savings account where the Junior ISA provider adds interest to your savings. This is a good choice for those that open a Junior ISA later on in their because it is safe and reliable. Some of the best Junior ISAs are fixed interest rate ISAs which can offer good rates but lock your money away for the duration. Easy access ISAs on the other hand might offer low interest rates but have readily accessible balances.
A Stocks and Shares Junior ISA on the other hand is a bit more complicated. The money can be invested in ready-made funds of self-selected shares and stocks. This is a riskier option as the value of the shares can go up and down and the Junior ISA account might very well end up with less money than before. Investing in funds and stocks are right for those that are either market savvy or have started investing in their child’s ISA from a very early stage.
Plus, there’s no tax payable on any gains you make from the Stocks and Shares ISA.
Why go for a Shares and Stocks Junior ISA?
The long-term returns from cash investments are quite low, and in the current climate of minimal interest rates and inflation, there is always the risk of your savings taking a heavy bashing.
Stocks and Shares ISAs tend to outperform Cash ISAs over the long-term – but the key phrase here is ‘long-term’. If you invest in a Stocks and Shares ISA, realistically you will need to be prepared to leave your money in it for at least five years. Best Junior ISAs are quite clear about the long-term and short-term risks associated with them.
Still, if you are investing in your child’s Junior ISA from the birth of your child, you have 18 years in total for the savings to mature. When it comes to Stocks and Shares, the best Junior ISAs are those where the providers have good customer service and are always at hand for advice.
On the other hand, Cash ISAs offer complete security to your invested money. So which option you go for really depends on your attitude to risk. You must take a decision based on your aims, priorities and savings to hand.
How to invest in Shares and Stocks Junior ISA?
Most Stocks and Shares providers allow you to invest with a £500 lump sum and then a monthly investment of £50. We’ll show you where to invest later on in the article.
Some would prefer to invest in self-selected stocks and shares of companies or individual bonds. This is often riskier than investing in a diverse portfolio*** of funds. One of the advantages of shares is that long-established companies might pay out dividends to keep you holding on to their shares. You can ask your provider to re-invest these dividends** into buying more shares or you can opt to have the dividends transferred directly to a savings account elsewhere.
When it comes to Stocks and Shares, the best Junior ISAs are those where the providers have good customer service and are always at hand for advice.
There are thousands of funds available covering markets across the world and best Junior ISAs would have access to the best of these funds.
Exercise caution with Stocks and Shares Junior ISAs
Stocks and Shares Junior ISAs can rise and fall in value and you can get back less in value than you originally invested.
Do only parents get to put money in?
Not at all. Anyone from you to family friends can invest in your child’s Junior Cash ISA. This is very handy on Birthdays and on Christmas!
Are there any drawbacks?
Yes. In a Cash Junior ISA, the money is locked away until the child turns 18. This means that if you are short on cash you cannot dip into the Junior ISA.
Also keep this in mind: The money in the Junior ISA becomes available to your kid the moment they turn 18. To many parents this might seem as a nightmare.
You need to keep an eye on how the interest rates on your Junior Cash ISAs stack up against the annual rate of inflation.
Where do you find the best Junior ISAS?
Junior Cash ISAs
Here is our list of the five best Junior Cash ISAs for you to look at:
Halifax | If you are an existing Halifax customer, you can get an eye popping 6% AER* on all balances from just £1. For non-Halifax customers the rate drops to 3% AER.
Nationwide | 3.25% AER (though rate drops to 2.10% AER from Jan 2015) on balances starting from £1.
Mansfield Building Society | 3.05% AER for balances starting from £1.
Furness Building Society | 2.6% AER for balances starting from £1.
Coventry Building Society | 2.35% AER for balances starting from £1.
Lloyds TSB | 3% AER for balances starting from £1.
Stocks and Shares ISAs
You can find information on ISA rules and regulations on websites of providers like Family Investments, who won the 2012 Moneyfacts Award for the Best Junior ISA Provider.
An alternative stocks and shares Junior ISA fund is Scottish Friendly’s Junior ISA, which is managed for you.
If you’d rather do the investment research yourself, below are examples of ‘fund supermarkets’ (companies that offer a variety of funds, stocks and shares under one roof, usually with financial advice in tow):
Alliance Trust | Access to 1,400 funds and minimum first deposit of £50.
Hargreaves Lansdown | Access to worldwide funds and minimum first deposit of £50.
Sippdeal | Access to 2.300 funds and no minimum first deposit.
The Children’s Mutual, meanwhile, offers a Stocks and Shares Junior ISA that tracks the performance of the FTSE All-Share Index (so you don’t need to worry about the pros and cons of lots of various different funds).
*AER: Annual Equivalent Rate: Interest that is calculated with the assumption that any interest paid is combined with the original balance and the next interest payment will be on a slightly higher account balance.
**Dividends: Most stable, secure and long-term performing companies offer cash or shares to their stockholders, encouraging them to hold on to stock.
***Portfolio: A diverse variety of financial assets like cash, gold, stocks and shares held by you, the investors and often looked after by finance professionals.
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