First of what is a Junior ISA (JISA)?
A JISA is a tax free account available to parent or legal guardian of a child, which is opened on their behalf. When opening the account, the ISA will be in the Childs name and will belong to the child. The money inside the account belongs to the child but they can’t withdraw it until they turn 18, apart from in certain circumstances, they can however manage their own account at the age of 16.
To open a Junior ISA your child must be both under 18 and living in the UK to be accepted. If your child lives outside the UK you can only apply if both the following apply: You’re a Crown servant (In the UK’s armed forces, diplomatic service or overseas civil service for example and they depend on you for care.
The limit for a JISA is £9000 (2020-2021), if any more than this amount is put into the junior isa, anything over will be held in a savings account in trust for the child. Any interest or investment gains inside the JISA is tax free.
Once the child turns 18, their account is automatically turned into an adult ISA (Sometimes called NISA). They can then choose to take the money out to spend as they see fit - for example, driving lessons, first car or further education.
To note you cannot have a Junior ISA swell as a Child Trust Fund. If you want to open a Junior ISA, ask the provider to transfer the trust fund into it,
The two types of Junior ISA:
There are two types of Junior ISA, the Junior Cash ISA and a junior Stocks and Shares ISA. You are able to open one of each for your child, but if you do open one of each that the limit of £9000 (2020-2010) is spread over both accounts. Note: Your child can only have 1 of each type of ISA.
Junior Cash ISA
A Junior Cash ISA is essentially the same as a bank or building society savings account.
The largest advantage of a Junior Cash ISA is the fact that your child doesn’t have to pay any tax on the interest they earn on their savings.
Junior Stocks and Shares ISA
With a Junior Stocks and Shares ISA account, you are able to put your Childs savings into investments like shares, bonds and funds.
Any profits or dividends from either shares, bonds or funds are all tax free.
Though investing is riskier than a cash account you do have a chance to give your child a bigger pot. Remember when investing, investments can go up swell as down and may not return the money you put in.
How safe is a Junior Cash ISA?
Cash you put into a authorised UK bank or building society is protected by the Financial Service Compensation Scheme (FSCS).
Up to £85,000 per person in any one authorised firm is safe even if the firm collapses.
It's worth noting that some banks are part of the same authorised firm, meaning that if they are part of the same firm that you are still only protected up to £85,000.
How safe is a Junior Stocks and Shares ISA?
Investments held in a JISA are safeguarded by a custodian on behalf of investors. This means that your investments are held in a separate account to the business and not classed as the firms assets.
If an authorised investment firm goes into default, which means it's unable to pay claims against it, the financial service compensation scheme (FSCS) will pay compensation up to £50,000 per person, per institution.
What to look out for with a JISA
Junior Stocks and Shares ISA is an investment product. Investment product providers must provide you with ‘Keyfacts’ information for you to read and understand.
They should include:
What the investment is and how it works
The key risks with the investment including risk of capital losses and counter party risks
Charges (fees to be deducted from your returns or capital)
Whether you’ll have the right to access to the Financial Ombudsman service and Financial Service Compensation Scheme (FSCS).
Opening a Junior ISA is another great way to keep the money inside your family’s wealth tax free. As your able to use your personal £20,000 allowance as an adult, then the Junior ISA allowance of £9000 (2020-2012). Not only keeping the money tax free but giving your child a jump start.