1st November, this year, marked the fifth anniversary of the Junior ISA (JISA), which allows parents to save money for their child which will be accessed when they come of age. JISAs continue to grow in popularity: 738,000 accounts had more than £920 million paid into them over the 2015/16 tax year. But, as with any savings product, there are pros and cons to saving for your son or daughter’s future using a JISA.
One of the key benefits of the account is the tax efficiency they offer. The JISA must be opened on the child’s behalf by a parent or legal guardian, but once it is open anyone can pay into the account and any income or gains within the JISA are exempt from UK tax – no matter who pays the money in.
Two types of JISA have been available over the past five years, with Cash JISAs having proven far more popular than Stocks & Shares JISAs. It’s perhaps not surprising that parents have largely opted for the JISA which guarantees their child won’t lose money, rather than taking a risk with their investment and betting on the stock market.
Whilst those who have gone for the Stocks & Shares JISA have reaped the benefits over the last five years as the stock market has consistently outperformed cash savings, there’s no way they could have known this when opening the account. Despite the potential for greater returns, opting for a Stocks & Shares JISA will always be a gamble, one which you may not want to take with money intended for your child’s future.
Another aspect of JISAs worth considering is the restricted access they offer. Once money has been paid into a JISA it belongs to the child; whilst they can manage the account themselves from the age of sixteen, the child is unable to access their savings until their eighteenth birthday. Whilst this will be seen as a positive for some, ensuring the money can grow and teaching their child about the benefits of saving over time, others will undoubtedly want their child to be able to access their savings before they turn eighteen.
One alternative is a regular children’s savings account, some of which actually pay higher rates of interest than JISAs. However, ordinary savings accounts are subject to the ‘£100 rule’ – if money paid in as a gift from a parent generates over £100 of interest in a year, all the interest will be taxed as if it belongs to the parent. JISAs are not subject to this rule, leaving it up to the parent to weigh up which they value more for their child’s savings: easy access or tax-free interest.