Junior Isas: how to turn £50 a month into £18,000 for your c...

Learn the rules

A junior Isa is a long-term, tax-free way to save for children in the UK. The accounts were introduced in 2011 to replace the child trust fund (CTF), which was discontinued amid government spending cuts. Unlike CTFs, junior Isas are not started with a government voucher – all of the contributions are voluntary.

Parents or guardians open an account on a child’s behalf, and anyone can contribute to it. The maximum that can be paid in each year is £9,000.

The money is locked away until the child turns 18, at which point they can do what they want with it.

There are two types of junior Isa: a cash version, which is like a traditional savings account; or an investment version, which can hold stocks and shares or funds. A child can have both at the same time, but only one of each type. The total annual contribution across both is capped at £9,000, meaning parents can split savings between cash and investments within that limit.

If parents gift money to their children and it’s saved outside a junior Isa, any interest above £100 a year for each parent is taxed as the parent’s income, not the child’s. This could create a tax bill if it pushes the parent over their allowances. In a junior Isa, all growth is tax-free, which is why many parents choose them.

To get started, parents will need their own national insurance number, their child’s details, and information about any existing CTF or junior Isa they plan to transfer.

Laura Suter, the director of personal finance at the investment company AJ Bell, says: “Whichever parent opens the account will be the registered contact, who is then responsible for choosing investments and managing the account until they turn 18. If your child already has a CTF, you’ll need to transfer it over when opening a junior Isa, as both accounts can’t be held at the same time.”

Compare accounts

Anna Bowes, a personal savings expert at The Private Office, says one of the simplest ways to begin is with a cash savings account. “These are easy to understand and can also help children to get excited about the importance of saving as they grow, getting them into the saving habit from an early age,” she says.

Suter says you should shop around to make sure you get the best returns available. “If you’re opting for a cash junior Isa account you should hunt out the best interest rate on offer,” she says. “Many banks and building societies will rely on people not moving their money when interest rates drop, but if you want to make the most of your child’s future savings you should make a note to keep checking you’re getting the best rate. If your provider has cut rates, you should switch to a better deal.”

Bowes says: “Currently the top rate is with Coventry building society and this can be opened by post, in branch or by telephone, and managed in branch or by phone.” However, she adds that although some accounts can be opened online, this may mean missing out on the best rates.

Save depending on your budget

“Some people set up a monthly direct debit, others just put in a lump sum for birthdays and Christmas,” Suter says.

If you can save a small amount regularly into a junior Isa, it can really build upover time, she says. “For example, assuming your investments grow by 5% a year after charges, investing £50 per month from birth would leave your child with a pot worth £18,050 by age 18.”

If you can afford to invest the full £9,000 junior Isa allowance each year, also growing at 5% a year after charges, from birth to age 18 it would give a pot of £265,851.

“The generous £9,000 allowance, comes with the trade-off that the money is locked up until the child turns 18, says Charlene Young from AJ Bell. “Junior Isas are a great way to build a meaningful nest egg for children to be able to put towards university fees, house deposit, or to take on as an Isa of their own having learned about investing in the meantime. But it does rule out using the funds for goals and spending before 18.”

Consider an investment account

Despite the long-term nature of these accounts, Suter says that many parents still default to cash. “Government data shows 42% of all money paid into junior Isas in 2022-23 went into cash junior Isas, rather than the investment version,” she says. But she emphasises the benefits of investing: “A stocks and shares junior Isa will usually have plenty of time to ride out any short-term dips in the market. History also shows that investing typically delivers better returns over the long term.”

Suter says over the past decade, £1,000 invested in a global tracker fund would now be worth £3,284, compared with £1,141 in a typical cash Isa, according to figures based on the Fidelity Index World Fund (the figures exclude any charges applied by the investment company you save through). The cash figures are based on Bank of England average rates.

Young says: “Being in the markets does come with ups and down in the short term. Individual company shares can move the most in the short term, so many parents might prefer to use a multi-asset fund to insulate against the ups and downs of just one asset type, while still benefiting from the long-term gains on offer from investing. Although a cash version of a junior Isa is available, there is a significant risk that the value of the money could be eroded over the long term thanks to inflation.”

A multi-asset fund can hold shares in a range of companies, plus other investments such as bonds. However, a multi-asset fund might not grow (or shrink) as much as a tracker fund specialising in one asset class, such as equities.

If the funds are needed within a few years, Alex Shields of The Private Office says a cash savings account may be more appropriate. “Ultimately you need to consider the level of risk you are prepared to take with the investments as if any capital losses even in the short term are unacceptable, a stocks and shares junior Isa is unlikely to be appropriate,” he adds.

Prepare for 18

The funds ultimately belong to the child whose name the account is in, but they cannot access any of the money until they reach the age of 18. However, from age 16 a young person can manage their account or open their own one, giving them the chance to learn about investing and saving. You could support this by talking to them about what they have and how you have saved or invested it so far, and how you made those decisions.

Bowes says: “The funds cannot be accessed until the child becomes 18, but at that stage they will have unfettered access to it. They could also transfer it to an adult Isa to continue to receive tax-free interest or investment returns.”

While some parents worry about handing over a large sum to an 18-year-old, Suter says that their research showed that fewer than one in 10 of our junior Isa holders withdrew the money and closed their account when they reached 18.