Account to open now that will help your child in future

Junior ISAs can be an ideal option for parents. By Elizabeth Anderson

If you’re keen to save money for a child or grandchild to set them up in later life, you may be considering opening a junior ISA. The benefit of a junior ISA is that all interest or returns through the account are tax-free, and up to £9,000 can be paid into a junior ISA per child each tax year.

Only parents can open one on behalf of a child, but grandparents or anyone else can pay into it.

Junior ISAs, which launched in 2011, appear to be increasing in popularity. Around 1.2 million of the accounts were paid into in 20212022, latest official statistics show, up from 955,000 the previous year. The average paid into each account across the year was £1,229.

It’s worth bearing in mind that the money inside belongs to the child. Parents cannot access it, and from age 18 the child will get full control of their money to continue saving or to spend as they wish.

“Junior ISAs can help with the financial mountains that young adults have to climb, such as the costs of a higher education, buying a first vehicle or first home, or getting married and starting a family,” says Jason Hollands, managing director of Bestinvest.

“But because they cannot be accessed until age 18, junior ISAs are not suitable for supporting costs like school trips or books.”

If you are considering a junior ISA, just like with an adult ISA you have two options. You can opt for a cash junior ISA or an investment junior ISA – or both.

For young children or babies who have years before they can withdraw money from the account from age 18, financial advisers say an investment ISA is worth considering. This is because money that has been invested in shares is more likely to grow more than cash savings over the long-term.

Over a three-year period, money invested in large company stocks has a 76 per cent chance of beating inflation, compared to a 55 per cent chance for cash savings.

Over a 10-year period, the chance of invested money beating inflation rises to 87 per cent, according to data from wealth manager Schroders.

However, there are never any guarantees when it comes to investing and the stock market can be volatile. The MSCI World Index, which tracks around 1,500 of the largest listed companies worldwide, grew by 24 per cent in 2023 but lost 17 per cent in 2022.

For those who like the idea of a cash junior ISA, where a set interest rate is paid, these are typically offered by high street banks and building societies, as well as NS&I. The top interest rates offered are currently 4-5 per cent.

Junior stocks and shares ISAs are offered by many online investment platforms such as AJ Bell, Hargreaves Lansdown, Interactive Investor, Bestinvest, Fidelity and Vanguard.

You either pick your own funds or stocks, or many platforms offer ready-made portfolios that are managed on your behalf.

There is currently a loophole that means children aged between 16 and 18 can apply for a Junior ISA and an adult cash ISA at the same time – providing a potential maximum ISA contribution of £29,000.

This loophole is being closed from next month, when the minimum age to open a cash ISA rises from 16 to 18.