Exploring Junior ISAs - New Tax-Free Savings Accounts for Children
Junior ISAs are special savings accounts for children, that offer tax benefits. The government allows junior ISAs to go tax-free primarily to encourage families to save money for their children's futures.
Not every child is eligible for this savings vehicle, though. It isn't open to children born between 1 September 2002 and 2 January 2011. The reason for this curious exclusion is that the government had a different plan for children's savings in that period - it was called the Child Trust Fund.
The two kinds of Junior ISA
You have two basic kinds of Junior ISA to choose from - the junior cash ISA and the junior investment ISA. On the cash ISA, the interest earned is completely tax-free. In the investment ISA, where the sum saved is invested in the stock market, the returns earned attract a low level of tax.
How is the junior ISA plan different from the Child Trust Fund?
The junior ISA plan is fundamentally different from the Child Trust Fund plan in one basic way - while the government makes matched contributions in Child Trust Fund plans, it doesn't offer such a benefit in the Junior ISA plan.
Freedom from tax is the only benefit that you get on these plans. They come with an upper limit to the amount of money that you can put away tax-free, though - £3,720 for each tax year (the tax year runs from 6 April each year to 5 April the following year). Once money is paid into a Junior ISA, it is locked up until the child turns 18. After the child turns 18, his junior ISA is automatically turned into a regular adult ISA and is accessible to its holder.
A few rules about how these savings accounts for children work
Legal guardians have complete control over a child's junior ISA until he turns 16: It doesn't necessarily have to be the parents of a child that open a junior ISA. Any legal guardian or caregiver of a child has the right. Once an account is opened, though, anyone at all is allowed to deposit money in it. The legal guardian has full control over the account until the child turns 16. At 16, the child gains the right to make decisions to do with picking an ISA provider or deciding the kind of ISA to go with. The money itself, though, only becomes accessible to the child when he turns 18.
Junior ISAs don't require contributions every year: Once you open a junior ISA with a certain amount of money, nothing compels you to keep adding to it each year. Leaving the account alone for years at a time doesn't cause it to expire. If you don't ever have any spare cash to contribute to the account, your child still gets the money originally placed in it when he turns 18.
A child can only have one cash junior ISA and one investment junior ISA at a time: The rules don't permit multiples ISA savings accounts for children at the same time. A child is only allowed one of each at a time. You have the freedom to move a junior ISA to another provider, though. When you switch to a new provider, the account with the original one is automatically closed down. Once your child turns 16, though, he has the freedom to open an adult ISA in addition to the Junior ISA that he already has.
When a child turns 18: When your child becomes an adult, his Junior ISA automatically converts to a regular adult ISA, retaining whatever cash/investment proportion it had as a junior ISA. Regular ISA rules apply - your newly adult child can save up to £11,520 a year in his ISA.
A junior ISA may not be right for everyone
Junior ISAs are only of use to children in affluent families. In many families, there isn't enough money to put into savings accounts for children anyway. The taxes on children's savings isn't a worry because these parents are only able to put a small amount of money into their children's accounts. Most families should be able to save a sizable amount over 10 or 15 years, though. Junior ISAs can be a good idea as a long-term savings plan.
Not every child is eligible for this savings vehicle, though. It isn't open to children born between 1 September 2002 and 2 January 2011. The reason for this curious exclusion is that the government had a different plan for children's savings in that period - it was called the Child Trust Fund.
The two kinds of Junior ISA
You have two basic kinds of Junior ISA to choose from - the junior cash ISA and the junior investment ISA. On the cash ISA, the interest earned is completely tax-free. In the investment ISA, where the sum saved is invested in the stock market, the returns earned attract a low level of tax.
How is the junior ISA plan different from the Child Trust Fund?
The junior ISA plan is fundamentally different from the Child Trust Fund plan in one basic way - while the government makes matched contributions in Child Trust Fund plans, it doesn't offer such a benefit in the Junior ISA plan.
Freedom from tax is the only benefit that you get on these plans. They come with an upper limit to the amount of money that you can put away tax-free, though - £3,720 for each tax year (the tax year runs from 6 April each year to 5 April the following year). Once money is paid into a Junior ISA, it is locked up until the child turns 18. After the child turns 18, his junior ISA is automatically turned into a regular adult ISA and is accessible to its holder.
A few rules about how these savings accounts for children work
Legal guardians have complete control over a child's junior ISA until he turns 16: It doesn't necessarily have to be the parents of a child that open a junior ISA. Any legal guardian or caregiver of a child has the right. Once an account is opened, though, anyone at all is allowed to deposit money in it. The legal guardian has full control over the account until the child turns 16. At 16, the child gains the right to make decisions to do with picking an ISA provider or deciding the kind of ISA to go with. The money itself, though, only becomes accessible to the child when he turns 18.
Junior ISAs don't require contributions every year: Once you open a junior ISA with a certain amount of money, nothing compels you to keep adding to it each year. Leaving the account alone for years at a time doesn't cause it to expire. If you don't ever have any spare cash to contribute to the account, your child still gets the money originally placed in it when he turns 18.
A child can only have one cash junior ISA and one investment junior ISA at a time: The rules don't permit multiples ISA savings accounts for children at the same time. A child is only allowed one of each at a time. You have the freedom to move a junior ISA to another provider, though. When you switch to a new provider, the account with the original one is automatically closed down. Once your child turns 16, though, he has the freedom to open an adult ISA in addition to the Junior ISA that he already has.
When a child turns 18: When your child becomes an adult, his Junior ISA automatically converts to a regular adult ISA, retaining whatever cash/investment proportion it had as a junior ISA. Regular ISA rules apply - your newly adult child can save up to £11,520 a year in his ISA.
A junior ISA may not be right for everyone
Junior ISAs are only of use to children in affluent families. In many families, there isn't enough money to put into savings accounts for children anyway. The taxes on children's savings isn't a worry because these parents are only able to put a small amount of money into their children's accounts. Most families should be able to save a sizable amount over 10 or 15 years, though. Junior ISAs can be a good idea as a long-term savings plan.