Guide to Tax Free Junior Isa Savings Accounts and their Restrictions

Parents in the UK who wish to provide for their child’s future financial needs will be pleased to hear that the UK government has introduced a new tax-free children’s savings account. Junior ISAs became available from November 2011 and are seen as a replacement for the previous Child Trust Fund scheme which was controversially axed. 

Most UK savers will already be familiar with the standard ISA (Individual Savings Account) accounts that are available for adults and the Junior ISA will work in a similar fashion, albeit with some important differences. Let’s look then at the main features, rules and restrictions that apply for Junior ISAs.

  – Eligibility

Junior ISAs are available to children aged under 18 who are UK residents. However, there’s an important caveat to mention. If your child already has a Child Trust Fund, then you can not also open a Junior ISA for them. And, very disappointingly, parents are not allowed to transfer their child’s money from a Child Trust Fund to a Junior ISA.

  – Tax-free status

The primary attraction of the Junior ISA is the fact that returns are tax-free. This is especially useful in a low interest rate environment and will help to ensure that your child gets a decent return on the money that you have saved for them. The return provided is free both of Income Tax and Capital Gains Tax

  – Cash ISA and Stocks and Shares ISA options

As with the standard adult ISAs, investors can choose whether to opt for a Cash ISA or a Stocks and Shares ISA, or whether they wish to split their money between both types of ISA. Cash ISAs offer the lowest risk but Stocks and Shares ISAs may be attractive to those who are prepared to live with a little higher risk in the hope of obtaining a better return.

  – Annual deposit limits

For the 2011/12 financial year there is a £3,600 annual deposit limit. It’s been announced that this limit will then increase in line with inflation from April 2013. It’s worth noting that parents can choose how they split this limit between a Cash ISA and a Stocks and Shares ISA.

  – Accessing the Junior ISA accumulated funds

Your child will be able to take ownership of their Junior ISA from the age of 16 but will not be allowed to make any withdrawals until they are 18. Prior to the age of 16, the account is held by the parent for their child. At the age of 18, the Junior ISA will automatically be converted into a standard adult ISA. Given that funds can ordinarily not be withdrawn until the child turns 18, Junior ISAs should be regarded as a long-term savings tool.

  – Ability to switch to another Junior ISA provider

Parents who are unhappy at the performance of their child’s Junior ISA are entitled to switch to another Junior ISA provider. However, in contrast to adult ISAs, your child will only ever have one Cash ISA and/or one Stocks and Shares ISA.

There was much consternation amongst parents when the current Conservative government chose to abolish the Child Trust Fund scheme, so the introduction of the Junior ISA is to be welcomed. Of course, a key attraction of the Child Trust Fund scheme was that the government provided a contribution towards each child’s savings fund, as an incentive for parents to save for their children. This government contribution element does not exist with Junior ISAs but they are still a worthwhile addition to the range of options that parents have when considering how to give their children a good financial start in life. For many, a Junior ISA will represent a great way to help fund their child’s future university costs or of providing them with a substantial deposit towards a first home.