If you are looking to start putting money aside for your child then you may be wondering if a Junior ISA account is the most effective solution. Most parents want to avoid paying tax on any income that their child’s savings might incur, however, unless you choose the right vehicle, you will be liable for any tax over the £100 a year threshold. This means that savings of just £3000 could generate a tax bill for you.
Junior ISAs avoid tax by forcing you to relinquish control of the money. Once your money goes into a Junior ISA account it can only be accessed by your child when they reach 18 years of age. At this point you child can withdraw some, or all of the money in their ISA accounts. Junior ISAs are by far the most tax efficient way to save for your child, and involving them in the process can help teach them the importance of saving as well as give them an early insight into how compounding works.
In this guide we look at ways of distinguishing how you find the best Junior ISA account for you, including an indepth look at both best Junior Stocks and Shares ISAs (otherwise known as an investment ISA) and best Junior Cash ISAs for tax free savings.
Which is the Best Junior ISA?
Before we answer this question it is best to distinguish between the two different types of Junior ISAs, the Cash Junior ISA and Junior Stocks and Shares ISAs.
A Cash Junior ISA operates as a tax free savings account that will earn interest on the amount you deposit. These are a reliable option as you are guaranteed to get back what you put in, plus any interest you have earned. However, when banks interest rates are low (such as they are now) you may find that inflation will erode away at your child’s savings over time.
Within a Stocks and Shares Junior ISA your deposits are invested on the stock market with the aim to grow your cash tax free over time. Historically Stocks and Shares Junior ISAs do better than a Cash Junior ISA long term giving you a greater return on your investment tax free. However, this is not without some degree of risk and your capital can go down as well as up with the volatility of the stock market.
The younger they are the more likely it is that investing will beat saving, as over longer periods, the stock market tends to outperform cash. Yet there is no guarantee…
Money Saving Expert
Remember that you are only allowed to have one Cash ISA and one Junior Stocks and Shares ISA at any one time.
The Best Cash Junior ISA
When choosing a Cash Junior ISA account, the most important consideration is the interest rate. Listed below are the best ISA rates available today on Junior Cash ISAs at UK banks and building societies. Please note that interest rates do fluctuate and these figures may change.
|Cash Junior ISA Provider||AER Interest Rates*|
|Coventry BS Junior ISA||2.95%|
|Darlington Building Society||2.60%|
|Family Building Society||2.40%|
* Rates checked 7th December 2020
As previously mentioned, ISA rates can change and it would therefore be prudent to check interest rates on a regular basis and transfer money between Junior Cash ISAs where appropriate.
When it comes to stocks and shares Junior ISAs the first thing to ascertain is whether you would prefer a ready-made investment portfolio or a self-invested option. Unless you are knowledgeable about the market, and have the time to study and analyse its ebbs and flows, you may want to opt for a ready-made portfolio where you can ‘set it and forget it’ and leave the investment ISAs until you have built more confidence in the market.
Most people who open a Junior ISA account today will consider using investment platforms. Investment platforms are an online service that allows you to buy, sell and hold funds. These can either be web based or held on a mobile app making trading easy on the go.
Be aware that your capital is always at risk when you invest in the stock market.
For those that enjoy the greater control of self invested ISAs here is our round up of the best providers available based on cost and ease of use among other entities. It is important to note that the value of your investments can go up as well as down and you should keep a careful eye on your portfolio and ensure you understand movements in the market.
AJ Bell Youinvest
AJ Bell Youinvest has a clean, easy to use app to enhance your Junior investment ISA trading experience and we found the customer service experience to be excellent.
Of course with AJ Bell they do offer a range of funds within their Junior investment ISA that allow you to take a back seat and let their experts do the hard work for you, however, if you would like to manage your portfolio yourself they do offer plenty of guides, as well as a well researched list of over 70 active and passive funds to get you started including ethical and overseas markets.
Importantly AJ Bell Youinvest works out as one of the cheapest options for a Junior investment ISA and has no fees for account set up, inactivity, cash holding, and withdrawals.
- Minimum investment: £25 lump sum or £25 per month
- Annual charge: 0.25%
- Dealing charge: £1.50 per deal online
Fidelity Investments has an excellent Junior investment ISA although whilst they have waived the charge for buying and selling funds they can still work out expensive for small portfolios. For self invested account holders they offer guides in three formats:
- Navigator: Fidelity collects information about your priorities and utilises this to provide you with fund options for your consideration.
- Select 50: This is a collection of 50 of the Fidelity experts favourite funds.
- Investment Finder: A powerful search tool which can filter thousands of investments on offer to help you find the most suitable one for you.
- Minimum investment: £1,000 lump sum or £50 per month
- Annual charge: £25 flat fee for less than £7,500 or 0.35% pa
- Dealing charge: nil
Hargreaves Lansdown made it onto our list because for a stocks and shares Junior ISA they provide good educational tools and guides to help you with your decisions. They also have a well laid out, easy to use trading platform. It is also worth noting that they have no dealing charges associated with the account.
In terms of investment options you couldn’t want for much more as they offer over 3,000 funds from both the UK and overseas including investment trusts, bonds, and exchange-traded funds (ETFs). Hargreaves Lansdown employs a team of analysts to create a Wealth Shortlist of funds that have been scrutinised to identify the greatest long-term performance potential to help you create a well diversified portfolio within your Junior ISA.
- Minimum investment: £100 lump sum or £25 per month
- Annual charge: 0.45%
- Dealing charge: Nil
For investors who already have an account with Interactive Investor, this can work out as the cheapest Junior ISA available as there are no charges for existing ii account holders. Interactive Investor also have an award winning web and mobile trading platform with an option for ethical investing which is gaining momentum as a socially responsible and profitable way of investing.
- Minimum investment: Any lump sum or £25 per month
- Annual charge: £120, £168 or £240 pa charged on a monthly basis
- Dealing charge: £7.99 per trade, reduced if paying the higher annual charge
Charles Stanley Direct
Charles Stanley Direct have a very competitively priced Junior ISA which is supported by great customer service. They offer lots of help with selecting your investments including a Guide to Investing if you are new to it all. When selecting funds you can take your attitude to risk into account as well as your investment objectives to help you narrow down your options and they also offer socially responsible investments.
- Minimum investment: £500 lump sum or £50 per month
- Annual charge: 0.35%
- Dealing charge: Nil
Here is our selection of the best ready made junior stocks and shares ISAs where the investment portfolio has been created and managed for you by the platform. This gives you a hands off approach, often based on your risk profile. Please note that our selection is based on cost and ease of use among other entities but is not an indication of the performance of the fund as this is impossible to predict.
If you’re looking for low cost, ready made Junior ISA investment solutions then Vanguard boasts one of the lowest platform and fund management charges available. They have also been awarded the Which Recommended Provider for their Junior ISA and are one of the only platforms that are owned by investor funds.
The Vanguard LifeStrategy funds include readymade investments that would suit both novice and passive investors and with 6,000 to 20,000 shares and bonds from across the globe, this is a good option if you are looking to reduce your exposure to risk.
- Platform charge: 0.15%
- Fund management charge: 0.22%
One of the advantages of the Fidelity Stocks and Shares Junior ISA is that they allow you to hold your investments in cash should you feel the market is going through a volatile stage and you feel that your money would be safer being held in cash for a period of time. They also offer ethical investing and have handy performance projections available on portfolios with guides to help you navigate the investment market.
- Platform charge: 0.35%
- Fund management charge: 0.25%
Nutmeg are currently the UK’s largest digital wealth manager and they offer parents saving for their children the opportunity to invest in their children’s future by offering a socially responsible portfolio that focuses on companies with environmental, social and governance standards. . The Nutmeg Socially Responsible portfolio is one of four investment styles to choose from including:
- Fully Managed: All expertly managed and continually tweaked to ensure maximum performance.
- Smart Alpha: Managed in house by JP Morgan
- Socially Responsible: Portfolio that focuses on the environment and society whilst being fully managed by an experienced investment team
- Fixed Allocation: A low cost option that is designed to perform without any intervention
- Platform charge: 0.45%
- Fund management charge: 0.17 **0% for 6 Months on all new accounts through this link
For investors who are comfortable using an app to manage their account, Moneybox offers a separate app for their Junior ISA which links to your bank account making deposits a breeze. They also have a neat little rounding up feature available to help make saving into a Junior ISA as painless as possible.
- Platform charge: 0.45%
- Fund management charge: 0.12% – 0.30%
The major advantage of Interactive Investor is that they charge one flat fee which gives you access to all the ii accounts they have on offer including the Junior ISA. Therefore, if you require more than one account then this might work out as the most cost effective solution for you.
- Platform Charge £9.99
- Fund Management Charge £7.99
Is a Child Trust Fund Better Than a Junior ISA?
Child Trust Funds are tax free savings accounts that attracted a contribution of up to £500 from the government. The Child Trust Fund was available to children born between 1 September 2002 and 2nd January 2011 after which the initiative was scrapped and replaced with Junior ISAs.
The two savings vehicles were introduced by the government to encourage parents to save for their children and have many similarities including:
- Generous tax benefits
- The flexibility to invest in stocks and shares or hold savings as cash
- Equal maximum allowance amounts
- Both managed by someone with parental responsibility
However, there are also important differences between the two schemes including:
- Contribution tax year for a CTF runs from the child’s birthday to their next birthday but for Junior ISAs the contribution tax year runs for each tax year.
- Whilst Junior ISAs are available to everyone, only children born between 1st September 2002 and 2nd January 2011 can have a Child Trust Fund.
- A child can have one or the other account but never both. This isn’t much of an issue as the Child Trust Fund is no longer available and anyone looking to set up a saving account for their child now can only open Junior ISAs or a child saving account.
- Unlike the Child Trust Fund, parents can open more than one Junior ISA for their child, a Cash Junior ISA and a Stocks and Shares ISA, however the annual Junior ISA allowance will have to be split between the two. It is also worth noting that you can only open one Junior Cash ISA and one Junior Stocks and Shares ISA per tax year.
- Child Trust Funds received a contribution from the government of between £50 and £500. In contrast to this Junior ISAs are not subject to any government contributions and rely solely on parents or guardians to contribute towards the money held.
Whilst the Junior ISA does not take receipt of the government contributions there are a number of ways in which it could be considered a superior product to the Child Trust Fund including:
Wider Choice of Investments
Junior ISAs provide parents with a wider selection of investments to choose from. This is great for parents who are happy to make their own investment decisions from funds, shares, investment trusts, ETFs, corporate bonds and cash and ultimately this level of flexibility could lead to greater returns.
Generally speaking, Junior ISAs are much more competitively priced than Child Trust Funds as many providers of CTFs chose to charge the maximum annual fee of 1.5%.
Release of Funds
The way that money is relinquished when the child reaches 18 is very different between the two types of savings account.
With a Child Trust Fund their investments are sold and all proceeds are handed to the child in the form of cash. However, with a Junior ISA the money held within the ISA is automatically transferred to an adult ISA where it continues to invest the money until the investments are sold by the child. This may be more appropriate to children who are not ready to make responsible decisions regarding money at the age of 18.
However, it is important to remember that regardless of which product you have, once your child turns 18, any saved money is theirs to do with as they see fit.
What is the Junior ISA Allowance for 2020 – 2021?
The annual Junior ISA allowance limit for the 2020 – 2021 tax year has risen substantially from the previous tax year of £4,368 to £9,000 for 2020 – 2021 tax year. If the amount deposited into a Junior ISA exceeds this amount in the 2020 – 2021 tax year, the excess will be held in the banks savings account in trust for the child. It’s important to remember that this excess cannot be returned to the donor at any time.
What are Junior Cash ISAs?
Cash Junior ISAs allow people to save for children whom they have parental responsibility for without having to pay any income tax on the interest earnt.
Outside of Cash Junior ISAs, children are taxed at the same rates as adults. Within Cash Junior ISAs the money you save is as safe as it would be with any other savings account and you are guaranteed to get back what you have deposited plus any interest earned on that amount. Cash Junior ISAs are the most tax efficient way to save for your child.
The interest rates on a Junior Cash ISA vary from provider to provider so it is prudent to compare rates before opening an account.
Top Cash Junior ISA
The best interest rate currently being offered on a Junior Cash ISA is 2.95% with Coventry BS Junior ISA. An account with Coventry can be opened in a matter of minutes over the phone and they take deposits starting at just £1.
If you already have a Junior Cash ISA or indeed a Child Trust Fund but would like to take advantage of the excellent interest rate being offered by Coventry BS Junior ISA, then you can easily transfer your money across to your new Coventry account.
Whilst Coventry Building Society are able to change this rate at any time at their own discretion, they have consistently offered the best savings rates since Junior ISAs were introduced in 2011. This is in a bid to encourage account holders to open an adult ISA when they come of age. And this seems to have paid off as four out of every five Junior ISA account holders go on to keep an ISA with the Building Society once they become adults, a testament to the level of satisfaction that account holders experience with Coventry.
Another provider to keep an eye on would be Tesco Bank. Tesco Bank are currently offering 2.75% AER, just under the 2.95% offered by Coventry BS.
Top Junior Stocks and Share ISA
This is a tricky subject to quantify as there are many variables that can make one Stocks and Shares ISA more suited to an investor than another. However, we have selected what we consider to be the best all rounder and our pick would be Interactive Investor.
At Interactive Investor a monthly fee of just £9.99 can give you access to their ISA, Junior ISA and trading account. This transparent fee structure can work out more cost effective should you require more than one type of account, and Interactive Investor have a full range of investment options available which is more than enough for the average UK trader and includes shares, bonds, trusts and ETFs.
Whilst their account does have an option to self invest, they have an excellent suite of portfolios including six Quick Start Funds which is a low cost, easy way to get started with access to the world’s markets. These are matched to your risk appetite as well as short, medium and long term goals and include passive and actively managed funds which are some of the most competitively priced on the market.
As well as this Interactive Investor offer Model Portfolios, which allow you to invest ethically and align your child’s future with the future of our planet.
Interactive Investor have also been awarded Best ISA Provider at the 2019 City of London Wealth Management Awards and are rated ‘excellent’ on TrustPilot. Their Junior ISA can be managed from both a web platform and from their mobile app which has a rating of 4.4 on app store.
What is a Junior ISA?
Junior ISAs are a government initiative to encourage parents to start saving for their children.
Introduced on the 1st November 2011, they allow parents, family, and friends to contribute towards tax efficient savings accounts for a child.
A Junior ISA can be opened on the birth of the child in question by either their parent, or their legal guardian and a maximum of £9,000 can be paid into the account for the tax year 2020 – 2021.
It’s important to be aware that once money has been paid into the ISA it can no longer be accessed by anyone other than the child whose name is on the account, on their 18th birthday at the earliest. Whilst the account holder is unable to access the money before their 18th birthday, it is possible for them to take over the management of the account on their 16th birthday. This can help encourage good saving habits in children in a controlled way.
Junior ISA accounts are open to any child under the age of 18 who is resident in the United Kingdom. A Junior ISA must be opened by a parent or legal guardian unless the child is over the age of 16, at which time they will be able to open their ISA themselves.
For any child who is already in receipt of a Child Trust Fund, it is not permitted to have an ISA as well as a Child Trust Fund, however, they can replace their Child Trust Fund with a Junior ISA and transfer the money across. For this reason it is prudent to check the transfer costs for any ISA account you are considering.
As mentioned previously, there are two types of Junior ISA, Cash Junior ISAs and a Investment Junior ISAs otherwise known as a Stocks and Shares ISA. Which of these accounts you choose will come down to your appetite for risk, as well as the age of the child in question. A Stocks and Shares ISA is much more suited to a younger child as historically they have given the account holder greater gains over time, however, the Cash ISA provides guaranteed returns on the interest rate stated. That being said, in periods of low interest there is a real risk that the gains on the account will fall below inflation and erode the value of the money over time.
It is possible to open both a Junior Cash ISA and a Stocks and Shares ISA and split the annual Junior ISA allowance between the two accounts. As an example, in the current tax year the Junior ISA allowance of £9,000 could be split with £3,000 being deposited in a Junior Cash ISA and £4000 being invested in a Junior Stocks and Share ISA.
How Children Are Taxed?
It’s important to know that children are taxed in exactly the same way as adults. This is why the tax relief available in the Junior ISA is worth taking advantage of.
This may seem like a confusing prospect given that children don’t usually have jobs or earn an income, however, they are still taxed on any income they earn from savings interest over and above £18,500. This figure represents the £12,500 personal allowance + £5,000 starting savings allowance + the £1,000 personal savings allowance which we have gone into in more detail below.
If you are reading this you could be forgiven for wondering why you need an ISA given the amount of savings that they can earn tax free. However, the issue arises when the money is a gift from a parent or guardian, at which point any interest earned that is in excess of £100 per year will be taxed at the rate that the parents are taxed at.
This is to prevent parents from depositing cash into banks and building societies for their children in order to avoid paying tax themselves. This is where the Junior ISA comes in, as a way of locking away money for the child, without it being subject to tax on the income earnt. It is also worth considering that once a child turns 18, the Junior ISA will be converted to an adult ISA, at which point it will continue to earn an income tax free.
What if Your Child Falls Below the Taxable Income?
A Junior ISA isn’t always the best solution, and if you are looking to open a Cash ISA for a smaller amount each month then you may be better off with high interest savings accounts. Currently the highest interest available on a BS Junior Cash ISA is 2.95% tax free, however, Halifax are currently offering 4% AER on their kids regular saver and lets you save up to £100 a month.
Before you open a Junior ISA it is worth having a detailed look at whether that is in fact the best option as while it may be tax free, once your money has been deposited in a Junior ISA, they can’t be accessed until the child’s 18th birthday.
Should you wish to open a Junior ISA with another provider, then there is the option to transfer some or all of the money across.
How Can Junior ISAs Help Teach Children About Saving?
The very process of opening a Junior ISA account, with your child, can help get them started in the world of finance and teach them valuable lessons about saving. As they learn to take their time to find the best provider and then watch their pot grow, they will be less likely to spend the money when they turn 18 and more inclined to continue with an adult ISA which could lead to a nest egg as substantial as a house deposit.
Your child’s future could be substantially changed with the early introduction of a Junior ISA and anyone can open an investment ISA with as little as £1.
Peter Field is a financial analyst and has written for InvestingReviews.co.uk covering topics from pensions, savings, investments and ISAs. His knowledge of the Investment market has proven invaluable, making his unbiased views and opinions open and honest for everyone. In 2021 Peter retired and is working towards enjoying more of the outdoors with his beloved labrador Millie.