How To Select The Best Junior Stocks & Shares ISA
An ISA is an individual savings account that offers the chance for individuals to earn up to £20,000 tax-free interest.
Not only can those who subscribe to an ISA benefit from tax-free interest from savings, but also enjoy the freedom to invest from their ISA and avoid paying tax on their returns.
There are specific individual savings accounts for children. Junior ISAs, also known as children's ISAs, provide an opportunity for anyone under the age of 18 to enjoy tax-free savings.
Types of Junior ISA
There are two different types of child ISAs, which makes it easier for parents to put away monthly savings for their children. It is possible for a child to have one of each, which may make for a good foundation for a savings portfolio.
Junior Cash ISAs: A Junior Cash ISA is a cash ISA designed for those under 18 years of age. Some Junior Cash ISAs give savers the freedom to access their money without notice, whilst earning interest on their savings.
Junior Investment ISAs: A Junior Investment ISA, or Junior Stocks and Shares ISA, is where the capital is invested in equity markets to potentially receive a better return at the end of the term. Junior Investment ISAs are not limited to equities; it is also possible to invest savings into bonds or funds with a mix of assets.
Therefore, Junior Investment ISAs provide the opportunity for tax-free investing for children.
Common features of a Junior ISA
Both types of Junior ISAs have common features, below are some you can expect to see in both Junior Investment and Junior Cash ISAs.
To qualify for any Junior ISA, the child must be under the age of 18 and live in the United Kingdom. Junior ISAs are available to those living outside the UK, but they have to satisfy certain criteria. If your child lives outside the UK, they will be eligible for a Junior ISA if they are a dependant and you are a Crown servant (for example a part of the armed forces, a diplomat or overseas civil servant).
Open ISAs from £1...
The majority of Junior ISAs can be opened from as little as £1. This could be extremely beneficial, as you could start building your child's nest egg from an early age without much financial commitment. Opening a Junior ISA at the start of your child's life could really help; the longer you save for, the greater the value of your child's savings will be.
Cooling off period...
If you have invested a certain amount of money into a Junior ISA, but you are having second thoughts about locking your money up, it is possible to withdraw the capital.
Some ISA providers allow you to withdraw the invested capital whenever; however, some ISA providers will only allow you to change your mind within the first 14 days of opening the ISA. The 14 day cooling period often can be found with Junior Investments ISAs.
Although regular cash ISAs allow individuals the chance to earn up to £20,000 tax-free interest, Junior ISAs have a smaller tax-free interest ceiling.
For 2017/18 individuals with Junior ISAs can earn up to £4,128 tax-free interest. If your child has both a Junior Cash ISA and a Junior Investment ISA, you should bear in mind that the tax-free interest allowance is split between both Junior ISAs.
It should be noted that any unused junior ISA allowance cannot be 'saved up' or carried over into the next tax year. The tax-free limit is decided by the government and is likely to increase to £4,260 in the coming tax year.
The tax-free limit for a Junior ISA is considerably lower than a normal cash ISA. However, once the child turns 18 years old, the Junior ISA converts into a regular ISA. This means that on the child's 18 th birthday their tax-free interest allowance will more than quadruple.
The significant increase in tax-free interest could be extremely beneficial for scenarios where a child has a substantial amount of capital that cannot be touched until they reach 18, as they may still avoid paying tax on their interest.
Protect savings after 18...
A Junior ISA will always convert to a regular ISA when the child turns 18. This may be important to remember, especially if you want to save money for a specific event such as university or buying a house.
If you want to ensure that your child does not touch the money in the ISA, you may want to consider opening an ISA in your name. However, this means that you would have to use a portion of your tax-free ISA allowance. Alternatively, once your child turns 18, you could convince them to transfer the money to a Help To Buy ISA.
Help To Buy ISAs only allow one withdrawal over the course of the ISA; this is often when putting down a deposit on a house. Utilising a Help To Buy ISA may be a good method to protect your child's savings until the right time.
Who can open an ISA...
It should be noted that not anyone can open a Junior ISA for a child. The ability to open a Junior ISA is restricted to those with parental responsibility for the child.
Typically, this means that only family members of the child will be able to open a Junior ISA such as a parent, grandparent, aunt or uncle. This restriction is to help avoid exploitation and to ensure that the child's ISA allowance is used for the benefit of the child.
If the child is over the age of 16, then it is possible for them to open their own Junior ISA without the need for an adult present.
Who can contribute to an ISA...
Despite the restrictions surrounding opening a Junior ISA, there are no such restrictions in terms of who can contribute to the ISA.
Any contributions to a child's ISA will be seen as a gift; therefore, parents, extended family members or even friends can add to a child's ISA to help their savings grow.
ISA transfers and Child Trust Funds...
Junior ISAs can be transferred from one child's ISA to another. If your child has an existing Junior ISA, but you feel that there is a more attractive Junior ISA elsewhere, you can transfer the funds from one Junior ISA to another without affecting your child’s tax-free interest allowance (providing the capital in the existing Junior ISA was from a previous year).
It is also possible to transfer the funds from a Child Trust Fund to a Junior ISA. This may be an appealing prospect, as Child Trust Fund accounts were stopped in 2011 along with the government contributions to Child Trust Funds.
It should be noted that most Junior ISA providers require you to transfer the entire savings from a Child Trust Fund to the Junior ISA.
Junior Investment ISAs
Junior Investment ISAs, or Junior Stocks and Shares ISAs, are long-term investments that potentially allow your child's savings to grow faster than they would with a regular Junior ISA.
This type of ISA gives your child's savings access to a wider range of investment types such as equity funds and investment trusts; effectively providing an avenue for tax-free investing for children.
Before opening a Junior Investment ISA you need to review the risks associated with doing so. Note that the capital invested with a Junior Investment ISA is at risk.
Using a Junior ISA as an investment vehicle for funds is a popular choice with investors, as they often invest with stocks, shares and bonds that have similar to the aims of the specific fund.
Individuals often approach an active fund manager to invest their capital into funds to beat the market. Although some may be put off by the fees charged by an active fund manager, they generally have a good record at beating market benchmarks such as the FTSE 100 index.
You can invest the capital in passive funds. But bear in mind that passive funds will only reflect the market benchmark not beat it.
Stocks and shares...
Using a Junior ISA as an investment vehicle for stocks and shares could give you the opportunity to make some serious growth in your child's savings.
However, it is important to note that a lot of Junior Stocks and Shares ISA providers do not offer the services required to invest directly into the stock market. In addition, investing directly into the stock market may expose your child's savings to much higher risk than other investments.
If you decide to open a Junior Investment ISA for your child, you need to review the potential fees that you may have to pay. Depending on your circumstances, you may have to pay a certain amount of fees that could substantially decrease your child’s investment returns over the course of the ISA.
Although the fees charged will vary from provider to provider, the majority of providers will charge the following:
- Transfer charges
- Dividend investment fees
- Buying charges
- Selling charges
- Fund switch charges
- Bid/offer spread
- Fund managers charges
- Platform charges
- Transfer out fees
If you could potentially incur some or all of the aforementioned fees, then you may want to recalibrate your expectations in terms of the size of your child’s investment return.
Financial Services Compensation Scheme protection
The Financial Services Compensation Scheme (FSCS) offers a certain amount of protection to capital in an ISA. The extent of the FSCS's protection will depend heavily on the type of Junior ISA your child has.
FSCS protection for Junior Cash ISAs ...
Junior Cash ISAs benefit from the protection of the FSCS, so long as the Junior ISA is with an authorised UK bank or building society. This means that £85,000 per person is protected and if any authorised bank or building society collapses, the return of up to £85,000 is guaranteed.
It is important to understand that some banking brands are under the umbrella of the same banking authorisation. Therefore, if you have opened multiple Junior ISAs for your child with different banking brands, you should double check that they do not share the same banking authorisation. If your child has more than £85,000 in a Junior ISA in the same bank (or multiple banks under the same authorisation) it's advisable to move the excess to benefit from another bank's FSCS protection.
FSCS protection for Junior Investment ISAs...
Junior Investment ISAs also enjoy some protection from the FSCS. However, the extent of the FSCS's protection for Junior Investment ISAs differs from the protection that they provide Junior Cash ISAs.
Junior Investment ISA assets are held by a third party, such as an authorised investment firm, on behalf of the investor. If the authorised investment firm collapses, the FSCS will pay compensation up to £50,000 per person.
The FSCS will not pay compensation purely because the value of the investment has fallen. This is because the capital is at risk with any investment.
Junior Investment ISAs risk v reward...
As with any investment, including Junior Investment ISAs, it is important to give full consideration of the risk versus reward on offer.
A good benchmark for assessing your investment is to compare what you could get from a fixed rate deposit over a similar timeframe, and then consider whether you are prepared to accept the level of risk to your child's capital in return for either a higher fixed rate, or the potential for a higher return.
Where can I find the best Junior ISAs
If you want to review the best Junior ISAs available on the market follow the links below.