If you want to save or invest for your child, you can use a special tax-free account called a junior ISA. It works in a similar way to an adult ISA, but there are some differences.
The basics of junior ISAs
Junior ISAs are designed to encourage parents to save or invest for their children. What do you need to know?
1. Many children under the age of 18 will be able to have a Junior ISA. But your child can’t have a Junior ISA if they already have a child trust fund. Children under the age of 16 will have to get their parent or carer to open a junior ISA for them. But those aged 16 or over can open one themselves.
2. There are two types of junior ISA. You can save money in a cash junior ISA or invest it in a share-based one or split the money you pay in between the two.
3. Your child can have one cash and one stocks and shares junior USA at any one time. Unlike with adult ISAs, you can’t take out a new one every year.
4. You’ll be able to transfer money between junior ISAs. You won’t have to stay with the same junior ISA until your child is 18. As with child trust funds, you’ll be able to transfer the money between different providers.
5. There is an annual cap on the amount you can pay in. You’ll be able to pay in a fixed amount every year (either every month or by lump sums). This allowance changes every year and is £4,368 in tax year 2019-20.
SAVVY TIP: If you have a child trust fund you can only have one account, so you have to make the choice between putting your money into stocks and shares or cash. You can’t hedge your bets and split it.
6. The returns will be tax free. You (or your child) won’t pay any tax on the interest from a cash junior ISA, and neither will there be extra tax to pay when you cash in a stocks and shares Junior ISA.
SAVVY TIP: Many parents think that children’s savings are tax free but it’s not that straightforward. Although children are unlikely to pay tax on their savings because they have their own personal tax allowance, and because – since April 2016 – all basic rate taxpayers can receive up to £1,000 in interest from savings tax free, if parents pay money into an ordinary savings account for their child, they are treated as though it’s their money if the account generates more than £100 in interest every year from the amount they’ve paid in.
7. Money in the junior ISA will be locked away until the child reaches 18. However, they will be able to take over the running of their junior ISA from the age of 16. A quirk in the rules means that, while a child is 16 and 17, they can have their junior ISA and a cash ISA.
SAVVY TIP: When the child trust fund or junior ISA matures, it will be rolled over into an ordinary ISA unless the child withdraws the money or transfers it elsewhere.
8. There won’t be restrictions on charges and minimum levels of topping up. Banks and building societies will be free to set their own level of charges for junior ISAs (unlike child trust funds, which had a cap on the level of charges) and how and when you’ll be able to top it up.
SAVVY TIP: Child trust funds had to accept irregular contributions of relatively small amounts (which providers said added to their costs).
What to do with your child trust fund
If you have a child trust fund, keep an eye on the rates. You can still transfer child trust funds between different providers, which may be worth doing.
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