Junior ISAs and Children’s Savings Accounts
Not long ago, the UK government started advertising its program to encourage families to save for their children’s future. The name of the program is Junior ISA – Individual Savings Account. It starts off just like your ordinary savings account – you put the money in and get a guaranteed interest rate. However, the savings in ISA are completely secure and tax-free. Finally, as soon as your child is 18, they get the cash out.
However, as we all know (sometimes too well), this only works if the interest rate paid on your savings beats inflation – which it doesn’t always do. To tackle that issue, there is an alternative way of saving under the Junior ISA scheme. You can invest in securities, with returns dependent on the performance of the underlying bonds and shares.
In the 2019/2020 tax year, you can put up to £4,368 into a Junior ISA. You can split that sum between the two ways of saving, bonds and shares, in whichever percentage split you wish.
Another way would be to let your child make this decision. It could be a very valuable exercise which will teach them the basics of banking and investing. Moreover, it would also give them a chance to really affect their own financial future and understand how important savings are.
If your child is a bit too young to be wholly trusted with deciding where the money should go, it is still a very good and helpful example for them to see you continuously setting aside money. It will even help them to understand why not everything they want can (or should!) be bought immediately.
Another advantage of an ISA is that the money is completely safe under the scheme. You have to make sure are that your ISA sits with a UK provider and that you have less than £85,000 with the financial institution in question. When your child turns 18, their Junior ISA will automatically become an adult ISA, meaning that none of the tax-free benefits are lost.
Child Trust Fund
There is a chance that your child already has a Child Trust Fund – the government automatically created them for anyone with date of birth between 1stSeptember 2002 and 2nd January 2011. In that case, your financial institution can convert this Trust Fund into a Junior ISA. This is definitely something worth considering since the interest rates on CTFs tend to be lower than those on ISAs. If you have concerns about which savings scheme best suits yours and your child’s needs, you need to consider speaking to a financial adviser.