UK Junior ISA 2020/21
With more parents wanting to save for their kids future, I thought it would be useful to provide my thoughts on Junior ISA 2020/21, especially with the new tax-year about to start (6 April 2020) and therefore the opportunity to benefit from the full year’s tax-free limit.
In this blog I’ll recap on what a Junior ISA is, the different types and some of the best savings rates available.
Let’s recap - what is a Junior ISA?
A Junior ISA allows you to save a certain amount each tax year for your kids, in their name, tax-free.
Each tax year kids can save up to a certain limit. Junior ISA 2020/21, the limit is increased to £9,000 (from £4,368 in 2019/20).
Previously known as a ‘Child Trust Fund’ until 3 January 2011. If you have an existing ‘Child Trust Fund’ already, you can transfer this to a Junior ISA.
Distinct from non-Junior ISA accounts, your kids cannot access money in their Junior ISA until their 18th birthday. On their 18th birthday the money will be theirs to do what they want with - so make sure you support them to form good money habits so they can then manage their money wisely.
By saving for your kids in a Junior ISA it means there is lots of time for the money to grow (so the younger they are when it is opened the better). The amount the money grows depends on which Junior ISA provider you use and whether it is a Cash ISA or a Stocks and Shares ISA.
A Junior Cash ISA is the same as a bank savings account in the sense that it earns an interest rate on the money you deposit. The rate of interest will vary by the bank or building society you have the account with.
A Junior Stocks and Shares ISA is for investing the money, e.g. investing in the stock market.
You can put all of the annual limit in either the Cash ISA or, the Stocks and Shares ISA or, share the limit in any proportion you choose, between the two. You can put more than the limit in but the amount beyond the limit will not benefit from the tax advantages.
The benefits of both types of Junior ISA is that the interest, return and any capital gains (up to the annual limit) is tax-free.
Can you have multiple accounts?
You can have both a Junior Cash ISA and a Junior Stocks and Shares ISA at the same time as long as the combined amount you pay in does not exceed the limit over a tax year (£9,000 for 2020/21).
Unlike Adult ISA’s you are only allowed to hold one Junior Cash ISA and one Junior Stocks and Shares ISA per child at a time. Therefore, if you want to open a new Junior Cash ISA account to benefit from a better interest rate then you will need to transfer all of the money from your kid’s existing Junior Cash ISA. You can, however, leave any Junior Stocks and Shares ISA with your existing provider and don’t need to have the same provider for both.
Saving in a Junior Cash ISA
As mentioned above, a Junior Cash ISA is very similar to regular bank savings accounts. In a lot of cases, however, the rate of interest that you earn from a Junior Cash ISA is higher than that offered on regular bank saving’s accounts for kids.
The biggest difference, however, is that as outlined earlier, with a Junior Cash ISA your kids cannot withdraw the money until they are 18 (except for in very exceptional circumstances).
So, if you want your kids to be able to access their savings before age 18 then you should set up a regular child bank savings account instead (or better still, as well). More details on the best regular savings accounts can be found here.
At the moment the best Junior Cash ISA rates are (12 March):
Beware, you might see regular bank savings (i.e. non Junior Cash ISA) accounts offering rates like 4.5% but these are usually only for one year and up to a relatively small deposit amount. Over the long term the rates you’d get on a Junior Cash ISA are likely to be materially higher. Whilst these rates are attractive, if your kids are young you may want to also or instead consider a Junior Stocks and Shares ISA to help make those savings work harder and as they could therefore grow much larger. I discuss the benefits of a Junior Stocks and Shares ISA next.
Junior Stocks and Shares ISA
Investing in the stock market is expected to grow your kids savings my much more than a bank savings or cash account over the long-term with a historical average return of between 5% and 8% pa if invested in the global stock market.
A lot of parents worry about the risks of the stock market and therefore do not consider this option. It is important to remember that a lot of the risks you hear about are due to short-term changes or people who have invested in individual companies rather than the whole stock market (via a fund). I would encourage all parents to take the time to understand this topic further. I have written a blog to help parents understand the perceived risks and build confidence to invest for their kids.
Once your investment account is set up the process is very similar to a regular savings account, i.e. you pay in regularly and don’t make changes.
There are a wide range of providers - below are just a few examples: (not recommendations)
Vanguard - Low cost, lots of choices, one of the world’s largest investment managers
Nutmeg - App based service to invest easily based on your risk preference
Hargreaves Lansdown - Expensive but offer great customer support
A few tips on investing:
Ensure that the charges you pay for an investment fund are low (< 0.5% pa)
Invest in the market (ideally a global fund) rather than individual companies
Don’t make changes as you hear news or get tips - most people lose money investing as they take too many actions. The less you do, the more you’re likely to have.
I cover these three points in more detail in this blog
Remember, you have the option of putting just some of your kid’s annual Junior ISA tax limit into a Junior Stocks and Shares ISA.
Alternatively, you don’t need to set up a Junior ISA to invest for your kids
You may decide to utilise the full annual limit into a Junior Cash ISA. If you do, however, still want to invest for your kids, you can set up an investment account yourself using yours or your spouses personal ISA allowance (to your annual tax free limit) and share it with you kids. Whilst the money will technically be in your name, this means having your family’s investments in one place, easily allowing you to make small top-ups (pocket money and birthday money) and, importantly, instead you decide if they are financially responsible by age 18 to receive their savings (or not). To help parents share your account, you can use the Blue Tree Sharing Tool.
Last word on Junior ISA 2020/21
Saving for your kids will not only help them financially when they become an adult but if you tell them about these savings as they grow up you can help them form a savings mindset. With so many young adults today going into debt, we need to make sure our kids are financially responsible to manage money they ultimately receive. So make sure you #SaveAndTell.
So, now consider:
Saving up to £9,000 for 2020/21 in a Junior Cash ISA** or,
Saving up to £9,000 for 2020/21 in a Junior Stocks and Shares ISA** or,
Saving up to £9,000 for 2020/21 split across a Junior Cash ISA and a Junior Stocks and Share ISA**
1. or 2. or 3., and / or saving for your kids via your or your spouses personal ISA allowance (accessible by your kids at an age which you determine appropriate).
** accessible at age 18.
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