What is a Junior ISA and who can open one?
A Junior ISA is a tax-efficient investment and savings account for children under 18. The Junior ISA limit for the current tax year (2017-18) is £4,128. There is no tax payable on the interest or investment gains up to this limit. However, if funds exceeding £4,128 are put into the Junior ISA, they will be held in a savings account, in trust, for the child.
If your child lives in the UK, and is under the age of 18, any parent or legal guardian can open a Junior ISA account on behalf their child. Whilst the money in the account will belong to the child, they are unable to withdraw it until they turn 18. However, they are able to manage their account when they turn 16.
Types of Junior ISA:
- Cash Junior ISA
- Stocks & Shares Junior ISA
Cash Junior ISA
This is ultimately the same as a building society or bank savings account. However, unlike a traditional bank savings account you are not required to pay tax on the interest earned.
Stocks & Shares Junior ISA
This allows you to put savings into investments, such as shares and bonds, with any profits earned remaining free from tax. Whilst it is important to recognise that these investments may be exposed to a higher level of risk than a cash ISA, they could also generate a bigger profit.
It is possible for a child to have either or both of these types of Junior ISA accounts. However, if they do have both, the limit remains at £4,128 for the 2017-18 tax year.
Who Provides Junior ISAs?
There are many different types of providers of Junior ISAs. These include online investment platforms, stockbrokers, bank/building societies, fund managers or independent financial advisers. It is important that you review all of your available options before making a decision on who to set up your ISA with. If you are in any doubt, it would be advisable to speak with an independent financial advisor on any matter relating to this investment.
OFF3R has a Junior ISA investment channel that lists some of the Junior ISA providers in the UK and allows you to compare the opportunities currently available.
Please head over to the OFF3R Junior ISA channel for more information.
Should you invest in a Junior ISA?
As with any form of investment, the value of your money can decrease as well as increase when you invest in a Junior ISA. To help you decide whether this form of investment is for you, we’ve listed the advantages and disadvantages, along with a list of questions to ask yourself before investing:
Advantage – Any profits made are tax-free
As with an adult ISA account, you can invest in a Junior ISA and not be subject to any tax on the interest earned. These savings and investments in the Junior ISA will remain tax-free even when your child starts working.
Advantage – Automatic upgrade to an adult ISA
When your child turns 18, their Junior ISA will transform into an adult ISA automatically, therefore saving you the time and effort required for setting up a new ISA account.
Advantage – Teaches the valuable lesson of compound interest
A Junior ISA is a powerful tool for teaching children the lessons of saving and investing due to the nature of it being inaccessible but transparent (i.e. you can see the balance). This allows your child to see the balance grow over time, to show them the power of any potential compounding returns and to enforce the concept of risk as well as the potential for return.
Disadvantage – Not all Junior ISA providers will accept transfers
If you wish to move money from a Junior ISA you may be subject to pay a penalty. Therefore, is important to ensure you check the terms and conditions of your provider.
Disadvantage – Provider charges
Based on the type of Junior ISA account that you opt for, as well as your choice of ISA provider, you may be required to pay charges. These fees may include: management fees; portfolio fees; charges on buying and selling shares; and fees for exiting the investment.
Advantage/Disadvantage – No withdrawals until the child turns 18
No money from your Junior ISA can be withdrawn until the child turns 18. For some, this could be a problem in an emergency was to arise and you needed access to these funds. However, this may be seen as benefit for those looking to enforce a disciplined approach to their child’s investments.
Need to Know
- In addition to their Junior ISA, those aged 16-17 can also have an adult Cash ISA account, but not a Stocks & Shares ISA. This means they can also contribute up to the 2017-18 limit of £20,000 into this Cash ISA account.
- Unlike adult ISAs, where it is possible to have multiple ISA accounts from different tax years, with a Junior ISA you’re only allowed one Cash and one Stocks and Shares ISA.
- Once the child turns 18, their Junior ISA will automatically turn into a standard ISA account.
Questions to Ask Yourself Before Investing in a Junior ISA
- Will you need access to your money? If you are investing in a Junior ISA it is important to be aware that only under extremely exceptional circumstances are you able to withdraw the money prior to your child turning 18. Therefore, if you believe you may need access to this money, then a Junior ISA may not be the right investment for you.
With investment, your capital is at risk. Investments of this type are subject to illiquidity (the inability to sell assets quickly without the substantial loss in value) and you should be aware that the value of your portfolio can go down as well as up and you may get back less than you invest. A Junior ISA may not be right for everyone and tax rules may change in the future. If you are unsure if a Junior ISA is the right choice for you, please seek independent financial advice.
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