Junior Isas

Junior ISAs, which replaced Child Trust Funds, can be a good long-term savings option for a child's future, paying interest without any tax.

Key points

  • Junior ISAs put a tax-free wrapper around your child's savings but...
  • ... no child pays tax on any savings interest unless they make more than their personal allowance every year
  • There's no access to the funds until your child reaches 18
  • When they reach 18, your offspring has complete control over the funds
  • Child Trust Funds can now be transferred into Junior ISAs

The cost of university, their first car, maybe even their first home. Even if your child is still just a bump under your jumper, you're probably wondering how you can best save for their future.

Children no longer get government grants into Child Trust Funds, but that doesn't mean there are no perks to be had in saving for your kids.

When the government ended the Child Trust Fund payments it replaced them with Junior ISAs (Individual Savings Accounts).

Although there's no contribution from the state with Junior ISAs, friends and family of the child can pay into the tax-free account every tax year.

The tax year runs from 6 April to 5 April, and the 2017-18 allowance is £4,128.

You should remember, of course, that most children don't pay tax on savings interest even if it's outside a junior ISA because they make less than the personal allowance every year.Piggy-bank

But don't forget that Junior ISA money is saved over the long term, meaning it really has a chance to grow.

Saving even a small amount each month or year can add up to a considerable nest egg by the time your child is 18, and at that time it will retain its protective tax-free wrapper until it's withdrawn.

What kind of Junior ISAs are there?

There are two kinds of Junior ISA... you can open a cash account or invest the money into a Stocks and Shares ISA.

With a Junior Cash ISA, you know that your child will get at least your initial investment and probably more.

Stocks and Shares Junior ISAs are riskier as the value can go up and down, depending on what's happening in the stock market.

Stocks and Shares ISAs tend to outperform cash options over extended periods of time, but you must always consider the element of risk

You may not get back the full amount you invested and, if you're in any doubt, speak to an independent financial adviser.

There are certainly risks but, over the long term, investments tend to outperform cash savings. You need to decide whether you're happy with the uncertainty.

If you like, you can split your child's Junior ISA allowance between cash and stocks and shares.

Since 6 April, 2016, there has been a third type of ISA, the Innovative Finance ISA for peer-to-peer savings and investments, but there is NOT currently provision for the Junior ISA under this scheme.

Junior ISA interest rates

Junior ISAs tend to have quite competitive interest rates compared with adult saving products. A piggy bank wearing a pair of sunglasses

On 17 November, 2014, independent financial researcher Defaqto listed 44 Junior ISAs on its matrix and headline interest rates ranged from 1.75-4%.

However, only two of these Junior ISAs had a fixed interest rate, so the others could change at any time.

This is why it's important not to be complacent over your child's Junior ISA and leave it languishing in a low-interest account - compare what's on offer frequently and switch if you can get a better deal elsewhere without penalty.

What if your child already has a Child Trust Fund?

If your child was one of the group born between September, 2002, and 2 January, 2011, then he or she will have received an official payment into whichever Child Trust Fund you opened for them.

Children who have such a trust fund don't also qualify for a Junior ISA, but you can still make tax-free payments into their account. As with the Junior ISA, the limit is £4,128 a year for the tax year 2017-18.

Unfortunately the fact that Child Trust Funds are not open to new business has meant that there's no competitiveness in the market and some of the accounts are now offering very poor interest rates.

However, since April 2015 it's been possible to transfer Child Trust Funds into Junior ISAs and it's likely to benefit you to shop around and find the best rates.

Can you control how the money is spent?

Ok, here's the big downside to saving into a Junior ISA... You have no control over how the money is spent.

When your darling offspring hits 18, they could decide to blow the entire amount on a big party and you can't do a thing about it.Wallet

With any luck, your child will understand and respect that you have saved this money to give them a head start in life, but there's no guarantee that it won't be spent on something you think is a waste.

If you're genuinely concerned about that then you might decide to save money into your own account, so you can choose when to give it to them. Of course, that does mean you don't get the same tax breaks.

You can compare a range of accounts, including Cash ISAs for adults, through our savings page.

When can you access the cash?

There may be times when you want to use the money you've saved for your child on their behalf. Perhaps they want to go on a school trip or buy an expensive musical instrument.

Who saved for little Johnny or Jane?

Deposits put into Junior ISAs typically go into one overall pot, but some providers allow you to mark pots of cash to show, for example, 'gifts from granny'

Unfortunately, that's not an option with a Junior ISA or a Child Trust Fund. Your son or daughter can't withdraw the money until they turn 18.

That means you may want to make some savings into a standard children's savings account. That way, you always have some cash you can draw on when they need it.

Most banks and building societies offer some sort of children's savings account, often with very good rates of interest.

Your child won't pay tax on the interest unless they've earnt more than their personal allowance in that tax year.

How do you find the best Junior ISA account?

As with any savings account, the only way to be sure that you're earning the most interest possible is to check out the competition.

By comparing Junior ISAs, you can be sure that your money is working hard for your child.

And don't forget that you can switch. If your child's Stocks and Shares ISA isn't performing well, or a Cash Junior ISA is paying a low rate of interest, you can transfer the funds to a different provider.

Once they reach 16, your child can start to manage their account themselves, although they can't touch the money for another two years.

They may want to think about transferring the money into an adult ISA such as the Lifetime ISA, which will be available in April 2017.

By Felicity Hannah