What's the best junior ISA?

If you assiduously put £9,000 a year into a junior ISA for your child, they will thank you when they reach 18. With luck, they may even put the money to good use, such as using it for a home deposit or paying for university. 

Of course, no one knows where interest rates will go on savings, and as for the stock market, how that will perform is anyone’s guess. But this is the risk all parents take when looking for a decent return on their little ones’ savings. 

Should I choose a junior cash ISA or a junior investment ISA?

The simple answer is it’s up to you. Your child can’t take this decision when they’re young and whether you opt for a safe savings account or a potentially riskier but also potentially more lucrative junior investment ISA is your call.

With a junior cash ISA, your child’s savings will earn interest in the same way a standard savings account does - but that interest won't be taxed.

With a junior investment ISA your child's money goes into the stock market - letting it rise or fall in line with the investments.

What are the best paying Junior Cash ISAs?

The new tax year began on 6 April 2022. Looking at the market on that day provides a snapshot of the market, and reveals who’s offering some of the best Junior Cash ISAs available:

• Coventry Building Society: This account pays 4.15% AER (Annual Equivalent Rate – the amount of interest earned on savings over a year). Customers and an account can be opened with just £1.

• Skipton Building Society: Another junior ISA that can be opened with £1, this account pays 4% interest.

• Stafford Railway Building Society: This junior ISA pays 3.7% AER.

Children’s savings and tax

Anyone searching for a savings vehicle for their child may question why ISAs tend to be favoured when children’s savings accounts often pay more interest.

The reason interest rates on cash Junior ISAs are typically lower than those on children’s savings accounts is the tax benefits. 

You might not realise it but children’s savings accounts can attract tax. If a child’s account earns more than £100 in interest, the parent pays tax on the savings. This rule exists to deter people from using a child’s savings account as a way to reduce their own tax liability. 

The only ways to avoid a tax bill on children’s savings are as follows:

• Someone other than the child’s parents or guardians must make the deposits

• The savings vehicle is a cash ISA or Child Trust Fund

• The amount of savings in the account isn’t big enough to attract more than £100 in interest

How to choose investment junior ISAs

Unlike cash junior ISAs it’s much trickier to compare Investment junior ISAs, as everyone has different requirements and appetite for risk. Also, the track record of an investment ISA isn’t a solid indicator of how it will perform in the future. 

This shouldn’t put you off, though, as investment junior ISAs are worth considering instead of, or in tandem with cash junior ISAs. The potential returns may well outstrip interest earned with a junior cash ISA, not least because children have time on their side.

Investment generally go up over time, but fluctuate in the short term, making them unsuitable over the short-term, but more ideal if you can keep them for five years or more.  

Where to find the best investment junior ISAs

Investment ISAs can be opened through an investment manager at a bank, building society or wealth management firm, for instance. You’ll need to shop around to find who’s offering a product you like, and when you do, concentrate on fees, noting what the annual management and trading charges, as well as the provider’s reputation. 

If you’re moving a large amount into a Junior Investment ISA it’s probably best to take independent financial advice up front, just to be sure you’re taking the right decision. 

When can my child access their ISA?

Although your child can decide where their savings -or investments - go from age 16, they can’t make any withdrawals before 18. At this age, their junior cash ISA or junior investment ISA automatically switches to an adult ISA, unless your child closes the account. 

Interestingly, between 16 and 18, your child can hold a junior cash ISA and an adult cash ISA. For these two years, their total allowance temporarily rises to £29,000 (£20,000 in the adult ISA and £9,000 in the Junior ISA). Investment ISAs can’t be opened until age 18.

How can I stop my child from cashing in their ISA?

One of the biggest worries facing parents is how to tackle the issue of access to junior ISAs. At 18 your son or daughter may well want a car, their own home, funds for university or even holidays and parties.

Talk to your child. Explain that they’ll lose lots of money if they remove their savings from the tax-free wrapper – even if they can take advantage of the £1,000 Personal Savings Allowance basic-rate taxpayers are entitled to.

But, fundamentally, it's their money, and as such they can spend it how they like - all you can do is offer them the best guidance you can.