Junior ISAs may not be the holy grail

Posted by David G. Evans

Junior ISAs on the face of it seem great. A tax sheltered investment for your children, encouraging you and them to save for their future. But are they really the best solution for kids or is it a case of one size doesn’t fit all?



The junior ISA was introduced in 2011 to supplement the regular adult ISA. These replaced PEPs and TESSAs, but effectively did the same thing; allowing investments in either cash deposits or stocks and shares where any gains were sheltered from the tax man. In the case of the adult ISA, these products are a good fit. Should you need to access the money in an adult ISA, the holder can withdraw it (with possible penalties). They will obviously lose that part of their total ISA allowance going forward but they have access to the money in times of need.


Children’s ISAs work a little differently and there are two characteristics that we would like to draw your attention to. Firstly the money invested in a JISA cannot be accessed until the age of 18, bar some unfortunate circumstances, and secondly when the money can be accessed - it is theirs to do with as they like. They are now adults and hopefully have the financial sense not to blow it on that graduation party, holiday etc. but if they do, there is nothing parents can do to prevent them.


Are ISAs great investments?

We have discussed this before,  but to summarise at current rates many cash ISAs are only keeping pace with inflation - they are not earning any real return. If there is no performance or return related reason, is there any benefit to trapping your child’s money in a cash JISA? 

The answer is, it depends. Our section on Children’s Taxes deals with this in greater detail, but there are 2 tax aspects to bear in mind.

Firstly children have the same income and capital gains tax thresholds as adults. They can earn money from wages, salaries and investments and only when they reach certain levels will they be liable for tax.

Secondly (here comes the but) there is a special provision to stop parents putting all their cash in their children’s name. Children can only earn £100 of income from money given by a parent without paying tax (£200 if both parents contribute). Anything over £100 will be taxed at the parents marginal tax rate. Note that money given by anyone else (e.g. grandparents) is not subject to the £100 cap.

Looking around, 3.25% seems to be the best JISA cash rate on offer at the moment. A deposit of £3,076 for one year at 3.25% would take you to the £100 threshold. A child’s annual JISA allowance is currently £4,000 so maximising their allowance would make your children liable for income tax outside the JISA tax wrapper. At face value this works very well in this case. Similarly if parents plan of maximising the JISA allowance each year then the financial benefits are more and more obvious.

Unless of course they need the money before they’re 18. 

Or they’re not fortunate enough to have £3,076 or more to invest.

In such cases it may pay to think a little more before committing to that 3.25% Cash JISA on offer. If that money is likely to be needed before they are 18, then the JISA is not really suitable and alternatives should be considered. Similarly if the interest earned is not likely to exceed the £100 HMRC threshold, then the tax benefits of the JISA are not as immediately evident.

What time horizon are you looking at?

Another question that you should be thinking about is whether a cash ISA is the best choice? HootLoot believes that cash is a suitable investment for a number of reasons - one of which is immediate accessibility. We don’t believe that cash is a good long term investment, which is the time horizon that should be used if considering investing in a JISA (depending upon the child's age). This doesn’t mean you need to rush into shares, but instead take time to understand the benefits as well as the risks and costs and make an assessment based upon the circumstances. (Don’t worry - this is a topic all by itself that we’ll discuss another time.)

Moving from cash investments to stocks and shares changes the the tax rules that apply. As mentioned, children have the same income tax and capital gains tax threshold as adults. What this means is that in the 2014/15 tax year children can earn £11,000 of capital gains before they will have to start paying tax. From a £4,000 investment this would have to be an exceptional investment to generate a 275% return.  More realistically it allows a child to hold on to an investment for a number of years outside a JISA before it could trigger a capital gains tax liability. On this basis there is little difference between a regular investment and a JISA, except that the investment can be sold at any time to access the cash. 

Remember that the £100 rule on income (not capital gains) from gifts from parents still applies. This applies to dividend as well as interest income, so investment products that produce capital gains rather than income are preferable if the money comes from parents. Also bear in mind that this £100 rule doesn't apply to income on money given by anyone else (e.g. grandparents), nor does it apply to capital gains.

One issue we have with many stocks and shares ISA products on the market (including JISA) is the charges and fees that they incur. Annual fees, administrative fees, fund manager fees etc all add up and eat into the returns that these products can offer. It is important to always look into the various charges imposed before committing. Also bear in mind the restrictions that JISA managers may impose on the products that you can buy. 

Looking for the best Junior ISA rates? Check out the thisismoney tables


Do they really encourage savings

Another issue with the JISA is that it may not actually encourage the savings they should. We would encourage all children to get into the good financial habit of saving, no matter how small, however the inability to access their money when they want it provides little incentive for kids to contribute into a JISA. Instead kids will more likely keep money they are responsible for outside JISAs and it is really the parents and families that will contributing on their behalf. This reinforces the view of some that JISA are really only a tool for the wealthy.

We would add that if the government was really keen on promoting and encouraging a saving product for children, they should have continued with the initial contributions they made under Child Trust Funds (CTF) program. 

What do I lose out by not opening a JISA 

One of the biggest disadvantages to not going the JISA route is that you lose out on the ability to transfer a JISA into an ISA when the child turns 18. This means that the money would remain insulated in the tax free wrapper until accessed by the (now) adult. For some this will an important issue and allow them to continue saving and investing well into their adult lives. For others the money will be needed at this point to buy a car, pay for university etc and therefore not relevant.

Investing without the JISA will mean keeping on top of the investment performance and ensuring that you don't trigger a tax liability when you sell investments. Don’t get too concerned about this as you can always sell the investment in pieces and realise capital gains over several years.

The Takeaway?

There is a lot of value in the ISA product for all UK savers, but we are not as convinced with the Junior ISA. In some situations they will make a lot of sense, but we don't believe that the tax benefits claimed will either be relevant or aren't otherwise achievable to many. 

We would suggest not to be coerced into committing to the JISA unless you can establish that the benefits are suitable, appropropriate and outweigh the restrictions. If you are looking to take full advantage of the JISA allowance for your children every year then timing will be an issue. For those that are not, you can always invest in the JISA at a later time, but once committed you can't reverse the decision. This is why we believe that there is no need to rush into the decision, but instead investigate and if need be talk to a professional that can advise you on these matters and their implications.


Looking for more information on Junior ISAs?

Check out our LIbrary

Further reading: JISA - GOV.UK


Please note that HootLoot are not tax advisers and nothing in this article should be seen as tax advice. In evaluating the best investment strategy for children, we would always encourage you to seek professional assistance.  



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