ISAs are growing in their popularity, with around 1.25 million Junior ISAs receiving contributions each year. It’s no real surprise that they’re growing in numbers given how effective they can be as a tool to save for your child’s future.
The Junior ISA is growing in popularity thanks to its tax benefits, which sets it aside from the simple child’s savings account, which you might see offered by your bank.
It comes in two main formats: Cash and Stocks &Shares. But which is best? And which should you choose for your child?
In this article, we’ll dig into some of the pros and cons of each option so that you can work out where to grow your little one’s nest egg in the best way possible.
What is a Junior Cash ISA?
A Junior Cash ISA runs much like a standard bank account where a rate of interest is offered in exchange for depositing your cash. The key difference between a Junior Cash ISA and a simple savings account however is that the interest that is received on the savings won’t be taxed. Sounds great, what’s the catch?!
There isn’t a catch per say, but a few things that you need to be aware of before jumping in to opening one.
Firstly, the amount that can be saved into a Junior ISA isn’t unlimited, in fact it’s set at £9,000 per tax year. This is for each child, so if you have multiple children, you can save £9,000 per year, per child, into the ISA.
The money is then held in the account until your child turns 18. When they reach adulthood, the account remains in their name and converts into an adult ISA.
With a Cash ISA, the rate of interest can be fixed or they may vary. Different providers (such as banks or financial services companies) will offer different deals. Depending on the age of your child when you set it up and the rates of interest available at the time, you might want to shop around and choose accordingly.
At this point, it’s also worth checking that the provider has FSCS protection, which ensures those savings up to the value of £85,000, much like other bank accounts.
What Are The Benefits Of A Junior Cash ISA?
There are a few key benefits of a Junior Cash ISA which might drive you to opt for this type of account over the Stocks & Shares option. The key advantage being that the cash option has the set returns offered by the rate of interest, as well as the relative security that this may bring. For parents (or legal guardians) who prefer the idea of a level of certainty on returns, the cash ISA might be a strong option.
If you’re getting around to setting up a Junior ISA for your child later in life, you might also find that a cash ISA is more suitable. Usually with investing options, a minimum time horizon of 5 years is required to ensure that you’ve got time to ride out the ups and downs that the stock market can present. As a result, if your child is closer to 18 and might need the certainty of the cash, it may be the preferable option.
Are there any drawbacks of a Junior Cash ISA?
Whilst a Junior Cash ISA does come with its benefits, there are also some downsides. Low interest rates are the key factor to consider when discussing the negatives. Often people like to think of the returns as set, which can feel secure. However, if the interest rates are lower than inflation, the cash value can be eroded in real terms. In other words, the money could be worth less in 18 years time than it is right now. This is particularly important if you’re considering setting up a Junior ISA for a very young child.
What Should I Know about a Junior Stocks & Shares ISA?
The Junior Stocks and Shares ISA does what it says on the tin: it allows the opportunity to invest into stocks and other investments. This could include funds, ETFs and bonds.
The opportunity to invest into stocks usually offers better growth opportunities. This means that over a time period of 18 years, the returns could significantly outpace both the rate of interest offered by a Junior Cash ISA as well as inflation. And the best bit? This growth is still tax free, up to £9,000 per year of contributions.
The Pros and Cons of a Junior Stocks & Shares ISA
Growth potential on a stocks and shares ISA is generally much higher than with a cash ISA. However, the potential for loss is also higher as there are no guarantees when it comes to investing. This means that a minimum time horizon of around 5 years is recommended when considering opting for a Junior Stocks & Shares ISA (so your child should be under 13, or definitely not looking to access the funds aged 18).
The Bottom Line
When it comes to picking the best for your child, as with everything, it depends on you and them and what is best for your family. It will depend on your time horizons and risk appetite. Generally, the Junior Cash ISA is best for those with short term time horizons or looking for set returns, whilst the Stocks and Shares Junior ISA offers greater potential for growth for those with longer time horizons and a higher attitude to risk. The good news is that parents don’t have to choose; they can opt to have both ISAs for their children. This can help balance the pros and cons and also allow for shorter and longer time horizons.
Remember that even starting with small amounts, be it in Cash or Stocks and Shares is
beneficial, as it will all help to give your child a financial headstart in future.
Next Steps
Before jumping into opening an account, take a moment to review your financial goals for your child’s savings. Have a think about your time horizon and your comfort with risk. Depending on how old your children are, you may consider opening the conversation with them too, to initiate conversations around financial choices. Then, once you’ve reviewed providers and options available, gather information and get that Junior ISA opened!
Written by Zoë Burt
Zoë is a former international wealth adviser turned financial educator. She’s since dedicated her career to working in startups to get key financial information to women and children who may not otherwise be able to access the knowledge. She is now co-founder of Financial Freedom Coaching, which is dedicated to closing the advice gap and ensuring people get the 1:1 support that they need when making financial decisions. Follow Zoë on instagram @wordsonwealth.
Investing puts your capital at risk. The value of investments can go down as well as up, and you may get back less than you put in. If you’re not sure whether an investment is right for you, it’s best to speak to a qualified financial adviser. Tax treatment is subject to individual circumstances and is liable to change.
Mia Wealth Limited (Mia Wealth) is an appointed representative of RiskSave Technologies Ltd, which is authorised and regulated by the Financial Conduct Authority (FRN 775330). Mia Wealth is a company registered in England and Wales (No. 15818371). Mia Wealth can be found on the Financial Conduct Authority Financial Services register under FRN 1033918. Our address is Fairbourne Drive, Atterbury Lakes, Milton Keynes, England, MK10 9R
