The pros and cons of a JISA to save for your child

Posted on June 11th, 2020 | Categories - News

The amount that you can save into a Junior ISA (JISA) every year more than doubled in April after Chancellor, Rishi Sunak, used his March Budget to raise the JISA Allowance.

If you’re thinking about putting money aside for your child or grandchild, you can save £9,000 a year into a JISA, up from £4,368. Now might be a great time to consider one.

What is a JISA?

A JISA is an Individual Savings Account open to all under-18s who are resident in the UK. It allows a parent to invest on their child’s behalf in a tax-efficient way, whilst introducing children to the concepts of saving and investing.

Interest earned from a Junior Cash ISA is tax-free and any gains you make on investments in a Junior Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax (CGT).

JISAs can be opened by a parent or guardian but once it is set up a grandparent can pay into it.

A child can begin to manage their ISA from age 16 and withdraw funds from 18. If they choose to leave it invested at that point, the JISA converts to an adult ISA.

Pros of a JISA

  • Tax efficiencies

The main benefit of a JISA is its tax treatment. As with an adult ISA, you don’t pay tax on interest earned in a Junior Cash ISA and neither does your child. If you opt for a Junior Stocks and Shares ISA any profits accrued are also free from tax.

You can opt for either type of JISA, or a combination of the two, but be aware that the JISA Allowance is the same whatever combination you choose – the £9,000 allowance will be split between all JISAs held.

  • Provide a nest egg

If you’re looking to provide a nest egg to help towards a child or grandchild’s university fees or the deposit on a first house, a JISA might be a good option.

A Cash ISA would be considered lower risk but a Junior Stocks and Shares ISA – investing your child’s fund in equities – could potentially see a bigger profit over the long term.

Cons of a JISA

  • The JISA Allowance

Despite the recent rise in the JISA Allowance it still represents a cap on the amount you can invest on your child’s behalf.

If you are looking to invest more than £9,000 a year, you’ll need to look at alternative ways to invest the additional amount.

The Allowance can’t be carried over either, so if you fail to invest the full amount one year, the allowance is lost.

  • You lose control of the investment as your child grows up

Once your child reaches age 16, they can start managing their own account, though they can’t withdraw from it until they reach age 18.

Once they reach 18, their JISA converts to an adult ISA and you lose all control over what happens to the money. If you want a say in what the funds are used for you might consider different ways to save.

Alternatives to a JISA

There are other ways to provide a nest egg for a child or grandchild and the right one will depend on many factors. What do you expect your child to do with the money? How much say do you want to have in that decision? When do you want the child to be able to access the amount?

Here are three alternatives to a JISA:

1. Pensions

Like ISAs, pensions are also tax-efficient but the tax relief on pension contributions comes at the point the contribution is made.

You can make pension contributions on behalf of a child or grandchild but the child won’t be able to access the money until they reach age 55 – the current minimum retirement age.

An investment over that long a term has the potential for significant gains, but the money is tied up. If you want to provide financial support with university fees or the deposit on a first house, for example, a pension is likely to be the wrong option.

As with a JISA, a pension can be set up by a parent or guardian and the Annual Allowance caps the amount you can pay in and still receive tax relief. You can pay up to £2,880, with the amount benefitting from 20% tax relief, giving a total of £3,600.

2. Savings accounts

Putting money into a bank or building society is considered very low risk. A savings account requires a minimal initial outlay and can be set up for anyone under the age of 18.

It will also allow your child to get used to concepts of money and savings, but returns might not keep pace with inflation. This might mean the account loses value in real terms.

It is unlikely to be the correct choice for long-term investment.

3. Trusts

The simplest form of trust to consider is a Bare Trust.

It can be set up on behalf of a child by a parent or a grandparent. There is no limit to the amount that can be placed in a Bare Trust and the held amount is treated as belonging to the beneficiary (in this case, your child), which can have tax benefits.

If you have a definite idea about what you want the money to be used for, you might find that a Bare Trust gives you insufficient control. From the age of 18, the beneficiary chooses what they do with their assets.

Other, more complicated, forms of trust might give you greater say over how the funds are used. If you’d like to talk to us about putting a trust in place, please get in touch.

Get in touch

JISAs are a tax-efficient way of saving for a child. If you’d like to discuss setting up a JISA, or any other investment options mentioned, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.

Please note:

The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be regarded over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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