There are a number of different ways for parents to invest and save for their children, and one of the most popular ways is by putting money into a Junior ISA. Unlike standard accounts (where any income or savings investment above £100 per year from money derived from either parent is taxable at that parent’s tax rate), Junior ISAs offer a tax-free way for parents to save for their children up to the age of 18. The annual limits are much lower than on the basic cash ISA: at present, no more than £4,080 can be put into a Junior ISA each tax year.
Control of the money in a Junior ISA passes to the nominated child the moment they turn 16, but no withdrawals can be made until their 18th birthday (unless the child is terminally ill). At this point, the junior ISA converts to a basic adult ISA and the child can do whatever they want with the money. As with basic adult ISAs, the junior ISA allowance can be split between cash or stocks and shares, and like adult ISAs can also be transferred at any time. However, due to the long-term nature of junior ISAs, investments are a better option – unless you’re risk averse and don’t want to risk losing any money.
Before deciding to put money into a junior ISA, parents should consider the restrictions in place for this type of account. You can’t have a child trust fund and a junior ISA (unless you are transferring the child trust fund into the junior ISA), and although the total amount in the ISA could potentially reach £105,357 by the time the child reaches 18 (assuming a 5% annual return and 0.75% in fees), it must be remembered that no money can be withdrawn from the account for 18 years. For that reason, junior ISAs are only recommended in cases where the parents (or child) will have no need to access that money for a significant period of time.