May 01, 2015

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Why Choose a Junior ISA?

Saving Money with a Junior ISA
Put cash into an ISA for your child and keep it away from the tax man.
Image Source: via Flickr, CC-BY-SA 2.0
Back in 2009, when my little boy was born, we applied for a Child Trust Fund (a long term tax-free savings accounts for children). At the time, the government were giving out £250 to little lads and lasses for their parents to invest in CTFs. Never one to turn my nose up at the offer of free money, we took the cash and stuffed it into a CTF with a low-cost UK Index Tracker. You can't apply for Child Trust Funds now because the scheme has closed. Junior ISAs are the new place to stash cash on behalf of little investors. I opened a Junior ISA for my little girl when she was born in 2013.

What the heck is a Junior ISA anyway?

An ISA is an Individual Savings Account. It is a scheme allowing people to hold cash, shares or unit trusts without having to pay any tax on dividends, interest and capital gains. ISAs were introduced in 1999, when they replaced personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs). Crikey, that's a lot of letters!

Child Trust Fund v Junior ISA

At the beginning of this tax year, it became possible to transfer a CTF into a Junior ISA. I've just done that very thing for my wee lad. I've shifted his investments from a CTF to a Junior ISA. The main reason why is that there is a great choice of funds available in a Junior ISA than a CTF. I used Hargreaves Lansdown as a platform for the Junior ISA because that's where I opened a Junior ISA for my daughter. I also have a SIPP there.

What is the Junior ISA allowance?

You can put up to £4,080 into a Junior ISA. This can be used in a Cash ISA or a Stocks & Shares ISA. The rates for Cash ISAs can be pretty so low, so investing in stocks and shares is probably a better bet for getting a return on your cash in the longterm. Putting your lolly in the stock market provides the greater opportunity for gains, but also carries more risks. However, drip feeding cash into a fund regularly over a long period of time (the length of time it takes your nipper to grow up into an 18-year-old) makes it a less risky proposition.

Who can pay into a Junior ISA?

Only a person with parental responsibility can open a Junior ISA on behalf of a child, but once an account has been set up, anyone can pay into it. Grandparents, friends and family members are able to pay money into a Junior ISA. That means they can gifts to their little relations which will help them in the long-term as well as all the toys and trinkets they'll be giving as the kids grow up.

What happens when the child turns 18?

When your child reaches the age of 18, they gain control of the Junior ISA. Do you think they'll be able to handle all that cash? While you had university fees or a deposit on a flat in mind when you began investing for your child's future, maybe they might decide to blow the lot on parties.

Is it worth getting a Junior ISA?

You might think that children don't pay tax anyway, so what's the point of a an ISA for junior? Children do pay tax though. They have the same personal allowance as grown ups, but most of them don't have jobs paying more than that personal allowance. When money given to a child by a parent brings in income of  £100 (gross), the parent has to pay tax on that income. So, having a shelter does make some kind of sense.