Banking

Should you open a Junior Isa or use your own for a child?

Deciding how to save or invest for a child or grandchild’s financial future is a conundrum faced by many Britons.

Encouragingly three in four parents are saving or investing money for their children, but the overwhelming majority – more than four in five – are doing so exclusively in cash, according to research by Natwest.

Some are making the most of the tax perks on offer either by saving or investing through a Junior Isa or by using their own £20,000 tax free Isa allowance.

Saving or investing for your child’s future well being via a Junior Isa may seem sensible, but parent will have to accept their child can spend it how they choose once they reach 18.

Junior Isas can be opened for any child living in the UK under the age of 18 and parents can contribute up to £9,000 each tax year.

Cash is favoured for both adult Isas and Junior Isas, with over two-thirds of such accounts being cash only products, according to analysis by Quilter.

HMRC figures show that each year, parents and grandparents contribute around £500million to their child or grandchild’s cash Jisa.

But there are concerns that this might not be the most effective way of providing a sufficient nest egg for your child in the future.

Heather Owen, financial planning expert at Quilter said: ‘While holding cash is no bad thing, favouring cash over investments is unlikely to build long-term financial prosperity as savers will miss out on the miracle that is compound growth, and inflation may simply erode the real value of their savings.

‘Holding too much in cash is particularly unsuitable for children holding Jisas as the money will be locked away for up to 18 years, meaning any stock market volatility can be smoothed and the scope for compound growth is much greater.’

Is cash sometimes king?

Junior cash Isas offer parents better returns than other savings vehicles with the added benefit of higher interest which is all tax free.

The average junior cash Isa is 1.67 per cent, according to Moneyfacts with the best deal on the market available through Bath Building Society currently paying 2.5 per cent interest.

UK inflation, currently stands at two per cent as of July meaning that the best cash Jisa deal will at least protect your cash somewhat – albeit for the time being.

The Bank of England has projected a temporary inflationary rise to 4 per cent in the final three months of 2021, meaning even those with the best Jisa deals could temporarily see the value of their savings fall in real terms.

Whether someone opts for a cash Jisa or a stock and shares Jisa will largely depend on their approach to risk.

Tom Selby, head of retirement policy at AJ Bell said: ‘How someone invests their money will depend on a variety of things including their goals and appetite for risk.

‘For those who have no appetite for risk, ensuring you get the best cash rate possible should be a priority.

‘As a bare minimum most people investing in stocks and shares want to at least ensure their long-term savings are not eroded away by inflation.

‘It’s worth noting that even the best paying cash Isas or Jisas will likely lock-in real terms losses in the current environment.’

The length of time a parent or guardian intend to either save or invest for will also be key to any decision.

For example, a parent looking to get started when their child is two or three might make a different choice to a parent looking to put aside money for their teenager.

CHILDREN’S FIXED-RATE ACCOUNTS 
Type of account (min investment) 0% 20% 40%
Halifax (£10+) (1) 3.50 2.80 2.10
Saffron BS (5+)  3.00 2.40  1.80 
(1) Regular savings of £10-£100 per month aimed at parents saving for children (up to the age 16). After 12 months the money is moved into another account. 
(2) Regular savings of £5 – £100 per month. You have easy access to your money 

James Blower, founder of the Savings Guru said: ‘If that time horizon is 10 years plus then you should almost certainly go for a stocks and shares ISA and this is because, over a five year time period, stocks have outperformed cash in the vast majority of those periods and in almost all periods 10 years plus.

‘But if you are looking at less than five years, then definitely look at cash Jisas.’

Is a Jisa always the best way forward?

The footballer George Best once said: ‘I spent a lot of money on booze, birds and fast cars. The rest I just squandered.’

One factor parents should be aware of before saving or investing in a Junior Isa is that once the child turns 18, it becomes their money to do what they like with.

While you might hope all your hard-earned savings might go towards something sensible such as a deposit for a property or on tuition fees, you ultimately won’t have the final say on how the money is spent.

For anyone fearful of what their 18-year-old son or daughter might do with a sudden cash windfall, using their personal Isa allowance could be an alternative option,

Anyone over the age of 18 can save or invest a maximum of £20,000 every tax year into a cash or stocks and shares Isa, which for most people is more than enough.

Blower said: ‘The main benefit to this option is that the parents keep control over the money as it is still legally theirs.

‘This is an option to consider if you are uncertain when you will want to hand over the money to your children.

‘The downside is you are using your personal allowances and missing out on tax free savings allowances that your children have in their own right.’

Outise of a Jisa, a child gets a £100 tax free allowance on any interest earned from saviongs.

Outise of a Jisa, a child gets a £100 tax free allowance on any interest earned from saviongs.

Another alternative for the more risk adverse might be to consider children’s savings rates.

For example, Halifax offer a monthly saver which allows £100 each month to be saved and pays 3.5 per cent interest, whilst Saffron Building Society offers a similar account paying 3 per cent.

Despite not benefitting for an Isa tax free wrapper, a parent will only be required to begin paying tax each year if their child gets more than £100 in interest from money given by a parent. 

‘Given that children have their own tax allowances too, unless they are over those, then this could be a better option for those saving for children,’ said Blower.

‘The only exceptions to this will be if parents want to lock their children’s cash away until they are 18 or they are likely to earn more than £100 in interest from money given by parents.

‘In these cases, Jisas will be better than ordinary children’s savings.’

Advice when deciding how to save for your child’s future

By Tom Selby., head of retirement policy at AJ Bell:

1. If you’re a saver, shop around

If you don’t want any investment risk whatsoever in your child’s investment portfolio, then shop around for the best possible cash rate. 

However, make sure you keep in mind that low interest rates mean inflation will eat into the value of their pot over the long-term.

2. If you invest then consider the time horizon

If you want to invest the money in stocks and shares then think about your goals, time horizon and how much risk you can tolerate. 

Generally, those with a longer investment time horizon have more latitude to stomach the short-term ups and downs of stockmarkets, although this will vary from person-to-person.

3. Consider the alternatives

Also, remember there are options outside ISAs and Junior ISAs. For example, SIPPs and Junior SIPPs offer upfront tax relief – although you won’t be able to access the money until age 55 at the earliest.

4. Keep your fees down

However you choose to invest, make sure your costs and charges are kept as low as possible, as even relatively small differences can make a huge difference to the value of your fund over the long-term.

5. Be Tax efficient

And, crucially, look to tax sheltered products like ISAs and SIPPs to ensure you keep as much of your hard-earned money as possible out of the hands of HMRC.’

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