HMRC recently published data on ISAs and Junior ISAs and it showed that there are now more than a million Junior ISAs being subscribed to.
It sounds like a lot, but if you consider that since the Junior ISA introduction back in 2011 more than 7.5 million children have been born, it means that fewer than 1 in 7 children have one. We think it should be more but suspect that many parents don’t fully understand what a Junior ISA is – and how it can help give kids a great start into adult life, particularly if it is as easy to set up and use as ours!
What is a Junior ISA?
A Junior ISA is a long-term savings account set up by a parent or guardian with a Junior ISA provider, specifically to build a nest egg for their child's future and which benefits from a number of tax advantages. Junior ISAs may be held in cash and stocks and shares and are available to children born in the UK.
A Junior ISA is held in the child’s name but is managed by a parent or legal guardian until the child is 18. Except in exceptional circumstances, withdrawals are not allowed until the child is 18 at which point it becomes an ISA and withdrawals by the young adult are allowed. To offer a Junior ISA, the provider, such as Beanstalk, must be approved by HMRC (the UK tax authority).
What are the advantages of a Junior ISA?
It is every parent’s natural instinct to want to support their child and opening a Junior ISA can be a great way of doing so. With the increasing costs of living, housing expense and university fees, even the smallest amount could give them a helping hand as they reach adulthood. Putting a little money aside over a long time can help build a nice lump sum if the value rises over time. Although there are no guarantees, just £5 saved a week from birth could grow into nearly £7,500 by the child’s 18th birthday if it grows at 5% per year!
The features of a Junior ISA make it an attractive option for putting money aside for a child.
1. It is tax-free. Any interest or investment income is tax free and there is no capital gains tax to be paid on increases in value of any investment.
2. The money belongs to the child and it is locked up until the child is 18. Many parents, and grandparents, tell us they really like this because it means that they are not tempted to touch it!
3. Anyone can pay money in. Unlike Beanstalk not all providers make this easy but once opened, friends and family can also pay money in. Our experience is that grandparents in particular want to help out and Junior ISAs simplify this.
4. It turns into an ISA at 18. At 18, the Junior ISA automatically turns into an adult ISA in their name which means they don’t need to take the money out straight away.
Junior ISA Rules
Junior ISA rules mean that:
1. The account is in the child’s name and is only accessible by them once they become 18.
2. The account can only be set up by a parent or legal guardian who is then responsible for overseeing it until the child is 18. (They are known as the “registered contact”).
3. There are two types of Junior ISA: “cash” and “stocks & shares” and a child is only allowed one of each type. You are able to transfer between providers so if you want to open an account of the same type with a new provider, you must transfer the old Junior ISA across.
4. Children born before 2nd January 2011 normally have Child Trust Funds which was the predecessor to the Junior ISA. If your child has a Child Trust Fund and you wish to open a Junior ISA, you must transfer it across.
5. Once made, contributions cannot be withdrawn except in a small number of circumstances such as the sad death or terminal illness of a child.
6. Different providers operate differently, but Beanstalk allows contributions to be made by parents or other friends and family, such as grandparents.
What is the Junior ISA limit?
There is a limit on total contributions that can be made into a Junior ISA in any individual tax year. The limit for 2021/2022 is £9,000 and was £9,000 in 2020/2021. This was a significant increase from 2019/2020 when it was £4,368.
What is a Cash Junior ISA?
Cash Junior ISAs are like a regular bank savings account in that they typically pay a fixed rate of interest on any savings. Rules vary but some banks require you to open accounts in branch or be an existing customer.
Typically banks offer fixed interest rates (which they vary from time to time). For example, if the bank offers 1% annual interest, then after one year £100 in a JISA would be worth £101.
Although cash JISAs give certainty (you know that the savings will grow by the interest rate), one thing to think about is the effect of the inflation rate on the value of your child’s savings. If inflation is higher than the interest rate, then despite the fact your child’s savings have grown, they will be able to buy less with the money than they could at the start.
What is a Stocks & Shares Junior ISA?
A stocks & shares JISA allows you to put money into a range of different investments such as company shares, investment funds and government bonds depending on what the provider offers. The growth in your savings depend on how well the investments do but there is of course a risk that you could end up with less than you put in.
Beanstalk JISA is a stocks & shares JISA with a simple choice of two tracker funds (an L&G cash fund and a Fidelity global shares fund). Unlike some stocks & shares JISAs, we do not have a minimum one off or monthly contribution requirement to open the account. It could be opened with savings earned on your shopping.
How many Junior ISAs can a child have?
A child is only allowed to hold one of each type of Junior ISA. You are able to transfer between providers so if you want to open an account of the same type with a new provider, you must transfer the old Junior ISA across.
Transfer a Child Trust Fund to a Junior ISA
If your child already has a Child Trust Fund, then they will need to transfer it to open either type of Junior ISA.
Transferring is really simple: when you apply for a Beanstalk account, we will ask you if you have an existing account to transfer. We need a few details from you and then we take care of the rest.
Our switch calculator will show if you could save money in fees by transferring.
Hopefully this quick tour of the Junior ISA has helped but we also publish a downloadable guide to JISAs available here.