The complete guide to junior ISAs

When ISAs were introduced in 1999, children had to wait until they were at least 16 before they could have a cash ISA or had to be 18 to invest in a stocks and shares ISA, but this all changed in November 2011 with the launch of the junior ISA or JISA.

Modelled on the adult account, JISAs allow parents, family and friends to contribute to an ISA for a child. There's an annual allowance too, though at £3,720 for the 2013/14 tax year (£3,600 for 2012/13) it's a smaller one than the full adult ISA allowance.

As with regular ISAs, there are two different types of JISA: a cash JISA, which is a savings product paying tax-free interest; and a stocks and shares JISA, which can be invested in the stockmarket with no further tax to pay on capital growth or dividends.

How do they differ to adult ISAs?

The key difference is access. While a parent or guardian can open an account for a child, money cannot be withdrawn from it until the child reaches 18. At this point, the child can close the account or let it roll over into a regular ISA.

But while the JISA is really just a mini version of the product many adults know and love, take-up has been poor. According to figures from HM Revenue & Customs, only 72,000 JISAs were opened in the product's first five months, with contributions totalling £116 million. Given there are six million eligible children, this represents a take-up of just over 1%.

Danny Cox, head of financial planning at Hargreaves Lansdown, believes this is down to a combination of the economy, lack of awareness about the product and the absence of any financial incentive to open an account.

"We've seen a steady flow of parents opening stocks and shares JISAs for their children and we do expect that as awareness grows they'll become more popular," he adds.

Child trust funds

Although junior ISAs are designed for the under-18s, not all kids are eligible for one. Children born between 1 September 2002 and 2 January 2011 qualified for the junior ISA's predecessor, the child trust fund (CTF), and must use this for their tax-free savings and investments.

While these work in exactly the same way as the JISA, with two types and an annual allowance of £3,720, many feel that children with a CTF are at a disadvantage to their younger and older siblings. "The rules around CTFs are really clunky, and the fact that they're being run off over the next 16 years is hardly an incentive for providers to launch anything exciting or offer competitive rates," explains Cox.

Comparing rates on cash CTFs and JISAs illustrates this. According to, the highest rate on a CTF comes from the Furness Building Society, paying 3.05%. In comparison, Nationwide pays 3.25% on its Smart Junior ISA (until 31 January 2014) and, if the parent also has a cash ISA with the bank, the child's account will get 6% from the Halifax.

Given the disparity, there are several campaigns to create a more level playing field for kids' tax-free products. For example, Hargreaves Lansdown is petitioning the government to change the regulations so CTFs can be transferred into JISAs. But Cox isn't holding his breath. "I do think government will equalise the rules but there isn't much appetite for it at the moment," he says.

Other tax-efficient options

While a JISA or a CTF can get a child's savings off to a tax-efficient start, there are other ways to save for them without filling the taxman's coffers. For starters, every child has their own income tax personal allowance of £9,440 in the 2013/14 tax year and, with few children working, there's plenty of scope for tax-free interest from a standard savings account. "Complete an R85 form at your bank or building society to stop tax being deducted on interest," says Anna Bowes, director of "But watch out that money given to the child by a parent doesn't earn more than £100 in interest as this will be taxed as the parent's."

One way to sidestep this issue is to use a JISA or CTF for money from a parent, with other family members contributing to the child's savings account.
Another product parents can pay into without having to worry about the £100 rule is an NS&I's Children's Bond. This allows investment of between £25 and £3,000 per issue and is tax-free. The current issue (issue 35) pays 2.5% interest fixed for five years.

Friendly Society bonds are another tax-efficient option, with some designed especially for children. These allow you to invest up to £270 a year or £25 a month and, providing you hold the bond for at least 10 years, returns will be tax-free.

Patrick Connolly, certified financial planner at AWD Chase de Vere, isn't overly impressed with them. "You can only pay in a small amount, and they do tend to be quite expensive. Many invest in with-profits too, which isn't the most exciting or transparent investment," he explains.

Alternatively, if you're looking to squeeze as much as possible out of the taxman - and have already made the most of other saving and investment products available - you could consider a stakeholder pension. These can be taken out on behalf of children and although they won't be able to access the money until they're at least 55, the tax breaks are pretty tasty.

Contributions receive tax relief at 20%, so for every £1 you pay in the taxman will add a further 25p. There is a maximum annual contribution of £3,600 for individuals without earnings but, because of the tax relief, you'd only need to pay in £2,880 to get this. Bowes adds: "The tax breaks are great, but you might feel that age 55 is a long time for your child to wait to get the money."

Parents looking to save for their children's future could also use their own ISA allowance. This has all the tax breaks but with the added advantage that, when their child turns 18, the parent retains control over how the money is spent.

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