The Junior ISA – a new savings account for children – allows you to save up to £3,600 a year (tax free) on behalf of your kids. If you contribute the maximum amount each year, your child could have £64,800 plus interest by the time they reach 18! Find out how you can start saving now.

• What is a Junior ISA? How does it work?
• Will a Junior ISA benefit my children?
• Children’s savings alternatives

What is a Junior ISA? How does it work?

Since 1 November 2011, your children’s savings can enjoy the same tax-free status that adults get through a regular ISA.

You can save up to £3,600 a year on your child’s behalf in a cash ISA, a stocks and shares ISA or split between the two. It’s the perfect way to put aside money in preparation for university tuition fees or maybe even a deposit for a house.

What else do you need to know?

• Both cash and stocks and shares Junior ISAs are available, and you can either spread the total allowance across the two or just choose to put it all in one. It’s possible to transfer accounts between providers, but you cannot hold more than one of each type at any one time.

• Junior ISAs replaced the Child Trust Fund (CTF) and have a higher annual limit (£3,600 compared to the CTF’s £1,200) but – unlike the CTF – there will be no government cash contributions to each child’s savings pot.

• Current CTF holders are not allowed to apply for Junior ISAs.

• Until the child reaches 16, accounts are managed on their behalf by a person with parental responsibility for that child. This is initially the person who applied for the account for the child, but this ‘ownership’ can be transferred to another person with parental responsibility. At age 16, the child assumes management responsibility for their account. Eligible children over the age of 16 can also open Junior ISAs for themselves.

• Withdrawals from Junior ISAs will not be permitted by account holders until the child reaches 18.

• There are a lot of Junior ISAs on the market, with many providers offering cash Junior ISAs that require a minimum balance of just £1, and stocks and shares Junior ISAs that accept minimum contributions of £10 per month.

Who is eligible for a Junior ISA?

Junior ISAs are available to children living in the UK who aren’t currently holders of a Child Trust Fund. That includes:

• Children born on or after 3 January 2011
• Under 18s born before September 2002

Will a Junior ISA benefit my children?

Short answer? YES!

“One of the tax benefits for parents of a Junior ISA is that there are no income tax issues,” says Danny Cox, Head of Advice at financial planning company Hargreaves Lansdown. “If a parent gifts money to an investment in the child’s name and the annual interest is £100 (£200 for joint gifts) or greater, the parent has to pay tax on the income. This is known as the parental settlement rule. However, this does not apply to Junior ISAs.”

In fact, Cox believes the rewards of a Junior ISA could be huge: “Save £3,000 in a Junior ISA every year from birth until age 18 and their coming of age present could be £95,730 tax-free, assuming a 6% growth after tax and charges.” To get 6%, by the way, you need to be putting money into a stocks and shares ISA. You’re not going to get that much, on average, with a savings account.

According to the 2011 Barclays Equity and Gilt Study, there is a 99% probability of stock markets outperforming cash savings over a period of 18 years.

Also bear in mind that the sooner you start saving, the better – as Jeremy Cryer from Gocompare.com explains: “You’d do well to invest as much as you can afford early on in the Junior ISA’s lifetime; the earlier you invest (you can open the Junior ISA as soon as your child is born), the longer your investment has to mature and gain interest.”

What else do you need to know?

Contrary to popular belief, children pay tax on their savings in the same way as adults do. The difference is that they rarely use up their annual tax-free allowance of £8,105. So do bear in mind that there are other tax-free savings options for children too.

Also, if you can’t afford to put away the full £3,600 each year, you won’t be able to take full advantage of the scheme and might want to consider other options. And importantly you cannot touch the money until your child is 18 (it can be transferred between providers but not withdrawn) which although a good thing is, of course, inflexible.

What Junior ISAs are useful for is making it easier to gift money to your children. Currently kids can only earn £100 a year in interest – or £200 for joint gifts – on money given by parents before the cash is taxed.

However you may want to take advantage of more flexible investments and save in your own name – and then simply give money to your children as and when they need it.

Children’s savings alternatives

There are a number of alternatives (or supplements) to Junior ISAs available.

Tax-efficient investment plans

• Shepherds Young Saver Plan

Tax-free savings specialists Shepherds Friendly have created the Young Saver Plan as a means to create a tax-efficient nest egg for your child. It’s an investment savings opportunity that offers:

Flexible savings: you save from as little as £7.50 or as much as £100 a month – vary your premiums to suit your circumstances.

A tax-exempt growth and lump sum: You won’t have to pay anything in tax on the growth of the savings fund or on the final lump sum payout.

Sickness benefits for peace of mind: After the child’s fifth birthday, as the parent you can claim up to £400 a week in benefits to help cover the costs, if the child is ill for over four weeks.

You can make a withdrawal at age 11: while the plan is designed to run for at least 10 years, parents or guardians have the option of withdrawing up to 25% of the fund when the child reaches age 11.

£30 of Love2Shop vouchers: as an added bonus, once you apply for a plan and your first premium is received you’ll get £30 of Love2Shop vouchers which can be used at Argos, Debenhams, HMV, River Island and loads more stores.

Be aware that the bonus rates vary from year to year depending on the investment performance (and the amount of sickness claims experienced). It’s therefore possible that you could get out less than you paid in (a risk you take with any type of investment).

• Foresters Ethical Child Savings Plan

Foresters Friendly Society is a mutually-owned society, which means it’s owned entirely by its members and not shareholders.

Their Ethical Child Savings Plan is not only income tax and capital gains tax free, but (as its name suggests) avoids investing in companies that are harmful to the environment, people or animals (some banks invest your money in everything from arms trading companies to the adult entertainment industry).

Foresters’ plan allows you to invest between £15 (online only) and £25 per month for your chosen term of between 10 and 25 years. Each account aims to grow the cash lump sum by adding annual and final bonuses. (Again – as with any investment – remember that bonuses can’t be guaranteed, and you may get in less than you put in depending on the performance of the investment fund.)

Regular savings accounts

Regular savings accounts require you to put a regular amount of money into the account each month, in return for a higher rate of interest. However, if you miss a month’s payment (or withdraw your money before the term of the account is up) you will often lose the rate.

Top children’s regular savings account:

• Halifax Children’s Regular Saver

This pays an impressive 6% AER, fixed for a year (make sure you review it after that time, as it will automatically transfer you to an variable rate).

You must pay in between £10-£100 a month, and no withdrawals are allowed.

Easy-access savings accounts

Easy access accounts let your kids access their money whenever they need it – however, the rates on these are variable, so you need to keep an eye on them in case they plunge downwards.

Top easy access savings account:

• Northern Rock’s Little Rock Account

This pays 3% AER on balances from £1–10,000. Access is by branch only, but there’s obviously no penalty for withdrawing money whenever you like.

Useful links

• Child savings and investment guide
• Child Trust Fund alternative: stakeholder pensions
• Stocks and shares ISAs: how to pick the best