Happy 5th Birthday Junior ISA! Are they a good option for a child's savings?

10th November 2016

Last week marked the 5th anniversary of the launch of the Junior ISA and in that time, they have become a popular way for parents and grandparents to put money aside for children. But are they a good option for those looking to save for their child’s future and how have they fared in today’s rate cutting environment?

In November 2011, the Junior ISA was launched, following the scrapping of Child Trust Funds. The scheme is designed to encourage saving for children, by offering a tax-free savings account. Junior ISAs were originally available to children born on or after 3rd January 2011, born before September 2002 or those that didn’t qualify for a Child Trust Fund. There is however a key difference between the two and that is the lack of the valuable government contribution, which those with Child Trust Funds benefited from. Following the scrapping of Child Trust Funds, many providers stopped offering accounts and so lots were stuck with these, at times, uncompetitive accounts. However, since April 2015, the government relaxed the rules, so that those with a Child Trust Fund could transfer it to a Junior ISA as well.

There are two types of Junior ISA – Junior cash ISAs and Junior stocks and shares ISAs and a child could have one or both types, although you can only open up to one of each, per tax year. With the Junior cash ISA, no tax is paid on interest on the money saved, whereas with the stocks and shares version, you won’t pay tax on the capital growth or dividends received.

Junior ISAs are opened by a parent or legal guardian on behalf of the child, with the money in the account belonging to the child, although it is important to note that the money cannot be accessed until the child turns 18. Parents, friends and family can all contribute to the Junior ISA, as long as it stays within the limit, which in the current tax year (2016/17) is £4,080. The allowance can be all used in cash or stocks and shares or you can split the allowance between the two.

Junior ISAs are becoming increasingly popular with nearly 740,000 accounts subscribed to in the last tax year (2015/16), of which nearly half a million (497,000) are Junior Cash ISAs, according to figures published by HMRC. The money invested is significant too, with well over £900 million invested in Junior ISAs in total in the same tax year.

As savers continue to suffer in one of the worst periods for interest rates ever known, it is interesting to see how Junior ISAs specifically and Children’s Accounts in general have fared, particularly following the cut in the Bank of England base rate in August this year.

On the whole it would be fair to say that those with Junior ISAs have not done too badly over the last five years, especially when you look at what has happened to adult’s savings accounts. Barring a Junior ISA that paid 6% tax free/AER from Halifax, which you would only qualify for if the registered adult also held a cash ISA with the provider, the top rate on offer remains the same as it did at the start of the first full tax year, since the inception of the Junior ISA. Coventry Building Society launched its Junior Cash ISA on the 5th April 2012 and still pays the market leading rate of 3.25% tax free/AER today. This rate, unchanged for over four and a half years, certainly contrasts with the plethora of rate cuts that we have seen over the same period and is especially impressive following the change in the Bank of England base rate.

When it comes to rate cuts affecting existing accounts, Children’s Accounts have suffered in a similar way to adult equivalents, particularly since the base rate reduction. However, it is important to note that even when the interest rate is cut, many accounts are starting from a much higher point than the adult equivalent, so the rate the child ends up with is usually still much more competitive.

Not only that but the rates on offer to open are much better, with up to three times more interest available in terms of easy access accounts, for example the 123 Mini Account from Santander pays 3% AER, compared to just 1% on the top adult account. In terms of Junior ISAs, you can also much higher rates than adult cash ISAs, through Coventry Building Society, as mentioned earlier (3.25%) and the likes of Nationwide at 3%.

So, with children faring better than adults, both in terms of rates available and the higher rates on existing accounts, there is an incentive to save for your child’s future. Junior Cash ISAs are worth considering as they not only offer competitive interest rates but also the fact that the money can’t be withdrawn until the child is 18, could be seen by many as an added benefit!

For more information on Junior Cash ISAs and to compare the very best rates on the market, take a look at our Junior Cash ISA Best Buy Table or call us on 0800 321 3581 to speak to one of our expert savings advisers.

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