Junior ISA’s are basically the name given to a tax-free savings allowance, ie: the amount, that can be saved tax-free for a child. The amount any child can save is their “allowance” and in the current tax year (2020/21), the limit is £9,000.
Some people think that children do not pay tax – this is not true! They pay tax like everyone else does in the usual way on earned income, this is where a junior ISA can protect their savings income from the tax-man.
The Junior ISA itself can be accessed by the person (child) after they turn 18 leading to the first potential pit-fall. Imagine you have saved all your life for your “little Johnny” to get a good start in life. Then “little Johnny” turns 18 and gets in with the wrong crowd (or decide they want a fast car for example). They simply walk into their bank and withdraw the lot. Even though you saved the money, you have no right to intervene or even know they have done it. Not a nice position to be in we think!
There are 2 types of junior ISA:
- a “cash” version, just like a bank account where the capital sum is guaranteed (secure, not subject to fluctuation) and earns a “fixed rate of interest”. These “cash” versions are basically the same as a bank account but the interest is paid tax-free.
- A “stocks and shares” version, earns potential returns via an investment so the capital sum is not secure (will be subject to ups and downs of the markets) but over the long term has the potential to provide greater returns than the cash version above!
Still not sure? As always get in touch with your local experts to help build your Financial Fortress!