Junior ISAs - Your questions answered

Junior ISAs were launched in November 2011. They can give your child or grandchild a head start in life and provide an excellent tax-efficient way of saving for their future.

You can invest in a Junior ISA each year. The money will grow over time and be available to the child on their 18th birthday.

If you opt for a Stocks & Shares Junior ISA, it could be worth nearly £108,000* if you invested £300 a month from the birth of the child until they reach the age of 18. Another benefit is there will be no income or capital gains tax to pay.

* This projection is for illustrative purposes and assumes a growth rate of 6%, after charges and is not guaranteed.

In this post we'll look at some of the key questions we're often asked about Junior ISAs.

What are the key points of a Junior ISA?

• A Junior Individual Savings Account (JISA) can be set up in a child’s name by its parent or guardian
• You can set up a Stocks & Shares ISA or Cash ISA or a combination of both
• Any investment growth is free of Income or Capital Gains Taxes
• For the 2012/13 tax year, the investment limit is £3,600 – this will rise in line with inflation from 2013
• Available to each child in the family each tax year
• Anyone can contribute to a child’s account at anytime through the year, including parents, grandparents, family and friends
• Money is locked away until the child reaches the age of 18, giving your investment time to grow
• The child is the beneficial owner of the Junior ISA
• Available to all children who missed out on the Child Trust Fund.

How many Junior ISAs can my child have?

Unlike regular ISAs, a child can only have one Cash Junior ISA and one Stocks & Shares Junior ISA at any time. You don't have to take out a new Junior ISA each tax year. The child's Cash and Stocks & Shares Junior ISAs do not have to be held by the same provider and accounts can be transferred between providers providing all the relevant Junior ISA conditions are met.

Who can contribute?

Once a parent or guardian opens a Junior ISA for their child, anyone can make a contribution up to the annual limit. Decisions on where and when to invest ISA contributions are made by the parent or guardian who is the registered contact for the account, but the account is held in the child's name. The money is ring-fenced for the child until they are 18 – no withdrawals are permitted before then, except in the event of terminal illness or death.

What is the definition of parental responsibility?

Someone who is the child’s natural parent, or who has legally adopted the child or has been granted parental responsibility by the court or a local authority is seen as having parental responsibility for them.

What are the tax rules of a Junior ISA?

A Junior ISA is not an investment itself, but simply a tax wrapper that protects the investment from personal liability for tax.

Any returns made with a Junior ISA are not subject to Capital Gains Tax or Income Tax for both the child and their parents or guardians. The Income Tax rule for gifts from parents to their children does not apply when investing into a Junior ISA. Therefore, if your children are lucky enough to receive substantial gifts, it will be more tax efficient for those financial gifts to use the Junior ISA allowance, primarily.

Using the Junior ISA allowance does not affect the child’s eligibility to open an adult cash ISA when they reach 16 years old.

What are the tax benefits of Junior ISAs?

Cash Junior ISAs will receive interest without deduction of tax. Stocks & shares Junior ISAs will grow free of any potential Capital Gains Tax liability. Interest income, such as that from government or corporate bond holdings, will be free of Income Tax. However, dividends from shares are paid with 10% tax deducted and this cannot be reclaimed, even inside a Junior ISA.

Note: tax rules can change over time and the benefits to your child will depend on their individual circumstances.

What other benefits come from investing in a Junior ISA?

Huge choice – if you choose to buy your Junior ISA from a company such as Fidelity, you can choose any of the funds in their fund supermarket. Fidelity’s FundsNetwork™ is an online fund supermarket that gives you a choice of over 1,200 funds from more than 70 fund providers

Flexibility – you can select more than one fund for your ISA and include funds from more than one fund provider

Quick set up – just one application form per child to complete

Simplified management - view all your account details, place deals and view balances online, 24 hours a day with Fidelity’s Account Management service.

How much can I invest?

When you invest in a Junior ISA, you can choose to invest with either a lump sum or on a monthly basis, or a combination of both. Most providers would require a minimum of £500 as a lump sum or £50 when paying a regular contribution. Just remember, the maximum you can contribute each year is £3,600.

Can a Junior ISA be transferred?

It is possible to transfer Junior ISAs between providers and also transfer monies from one Junior ISA type to another, e.g. from a Cash Junior ISA to a Stocks and Shares Junior ISA. However, it will not be possible to transfer a Child Trust Fund into a Junior ISA or vica versa.

Can I access the money held in a Junior ISA?

No, you cannot access the money held in a Junior ISA. Like a Child Trust Fund, the account is set up for the child and only they can access the money when they reach 18 years old.

Do I have to take out a new Junior ISA, with a new provider, each tax year?

No. Unlike an adult ISA where you can take out a new ISA with a different provider each tax year, all the money in your Stocks & Shares or cash Junior ISA is kept with one provider (though you can transfer the funds to another provider at any time if you wish).

What are they key asset types when investing in Junior ISAs?

Here are the different types of investment your Junior ISA can have:

• Cash is one of the safest investment classes
• Bonds are issued by institutions to raise money. Bonds issued by the UK government are known as Gilts
• Shares or equities offer greater potential over the long-term because they reward investors for taking a greater risk
• Alternative assets cover a wide range of investment options, such as commercial property or commodities.

How does topping up a Junior ISA investment work?

• You can add to your child's Junior ISA at any time
• You can normally top up online by simply logging in to your Junior ISA account
• You can call your provider and pay by debit card or by cheque. 

What about friend and family top ups?

• Friends and family members, can make payments to the account but the investment decisions must be made by the parent or guardian
• For lump sum payments, you complete a Junior ISA top up form. A cheque payment can be made by any friend or family member
• Alternatively, lump sum payments can normally be made by debit card over the phone
• You can often set up a monthly savings plan by simply completing a Junior ISA application form
• You can usually set up more than one monthly savings plan so grandparents, friends and other family members can all contribute to the Junior ISA.

What happens when the child reaches 16?

• The child can start making limited investment decisions such as switching between funds in their Junior ISA, but the instructions must be given by the parent or guardian
• It will be possible for the child to remove the adult name and take over management of the Junior ISA account
• If you are setting up a Junior ISA for a child between the ages of 16 and 18 the account must be set up by a parent or guardian.

What happens when the child reaches 18?

• Junior ISAs automatically become ‘adult’ ISAs
• The parent or guardian's name is removed from the account, but the named child remains the beneficial owner
• The provider writes to the named child on their 18th birthday confirming that they now own an adult ISA
• All investment decisions must now be made by the named child
• Payments can no longer be made by family or friends
• All monthly savings plans will stop – however, they can be restarted by the named child
• The Junior ISA will no longer be visible in the parent or guardian's online account
• The maximum investment limit will rise to the adult ISA allowance, so they can save more tax-free (currently £11,280, but this will rise in line with inflation each year from 2013) 

How can I buy a Junior ISA?

If your child is under 16, someone with parental responsibility (for example a parent or step-parent) must open the Junior ISA for them.  Children aged 16 to 18 can open their own Junior ISA. But someone with parental responsibility could still open the account for them.

A range of banks, building societies, credit unions, friendly societies and stock brokers offer Junior ISAs. You can find out more information directly from them about their terms and conditions and how they operate their accounts.

To open a Junior ISA you need to:

• Choose the type of Junior ISA you want for your child, either a Cash or Stocks & Shares Account (or both), getting financial advice if necessary
• Check which account providers offer the type of account you want
• Choose the provider - they may be your own bank or building society or someone completely different
• Get an application form from the provider - this could be done in person, over the phone or via the Internet.

About ISACO

ISACO was established in 2001 by brothers Stephen and Paul Sutherland and is the first financially regulated firm to offer adventurous ISA and SIPP investors a unique personal investment service that shares on a daily basis our star-performing investor’s thoughts, personal insights and investment decisions.

Clients enjoy being informed throughout the year what ‘best of breed’ funds our premier investor currently owns, when he’s buying and when he’s moving into the safe harbour of cash – helping clients enjoy more control, manage their portfolio more effectively and benefit from the potential of outstanding long-term returns.

For more information about ISACO and our Investment Guidance Service, please read our free brochure.

If you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.