I’m a money expert – how set your kid up with almost £8,000 from just £25 a month

JUNIOR ISAs were launched by the government in 2011 with the intention of making it easier for parents and guardians to put money aside each year for their children without being taxed on the interest.

Saving for your child’s future could help them pay for university, the deposit on their first home, or give them a lump sum to buy a car or help them pursue a career.

In order to qualify for a Junior ISA, your child must be under 18 and living in the UK, although if your child lives outside of the UK and you are in the UK armed forces or work for the government overseas, you may also qualify.

There are two types of Junior ISA: a cash Junior ISA, where you will not pay tax on interest on the cash you save, or a stocks and shares Junior ISA, where your cash is invested and you will not pay tax on any capital growth or dividends you receive.

Each year you can save a maximum of £9,000 in a Junior ISA, and you can choose to split that across both types , or just use one.

This applies even if you have your own ISA account.

The child can take control of the account when they’re 16, but cannot withdraw the money until they turn 18, unless there are exceptional circumstances.

Even putting aside a small amount of money each month can give your child a decent lump sum when they turn 18, said David Nottingham, personal finance expert at NFU Mutual.

How many people currently use Junior ISAs?

According to the latest data from HMRC, more than £1 billion is now invested in Junior ISAs each year – the first time it has gone over that amount.

Families invest an average of £1,133 each year, and nearly 950,000 Junior ISAs had money paid into them last year.

“We have seen more people saving during the pandemic,” David said, adding that this was because people weren’t spending as much on going out or holidays.

But he expected that that might change as the cost of living goes up and people have less money left over at the end of the month.

Should I choose a cash or a stocks and shares ISA?

David said: “In a stocks and shares Junior ISA, most families can benefit from the fact the money is locked away until a child turns 18, giving them time to ride out any ups and downs in the stock market and reap the benefit of long-term investing.

“However, only 30% of Junior ISAs are invested this way.”

Investing in the stock market over a long period of time can often be more lucrative than simply investing cash in an account with interest.

But because the stock market goes down as well as up, in theory you could lose money.

Over the last 10 years, £1,000 invested in the stocks and shares linked to the world’s largest companies would be worth around £3,090 today.

In contrast, £1,000 invested in cash in an account with 2.6% interest, which is about the best rate available today, would only be worth £1,296.57.

Even though you can’t withdraw your money from a Junior ISA, you can move it from a cash Junior ISA to a stocks and shares Junior ISA, or vice versa.

You can also move from one provider to another if you find a better deal somewhere else. 

How do I set up a Junior ISA?

“How you set up your Junior ISA is about customer preference,” David said.

“You can set it up yourself, or you could speak to a financial advisor who would be able to advise you on any savings vehicles which are available to you.

“It depends both on your attitude to risk and your preference for advice or not.”

There are a number of mainstream providers who offer Junior ISAs.

At the moment, the best Junior ISA deal from well-known providers is with Coventry Building Society, which is paying 2.6% interest, or Tesco Bank, which pays 2.25%.

You can use a comparison website such as MoneySavingExpert to see the best current deals.

Once you’ve identified which bank or building society you want to use, you can contact them directly.

There may be options to pay money in via a branch, by cheque, or online, but check which of these are possible before you commit.

Some Junior ISAs also charge fees, so you need to check that first, and take it into account when you think about how much you might save over time.

How much do I need to save each month?

The amount of money you save each month is up to you, and can vary each month, as long as you don’t exceed £9,000 a year.

To do that, you would need to put in £750 each month, or you could put £9,000 in in one go.

“You can put in a lump sum or you can make a regular payment,” explained David.

But there is no minimum amount to save, so you could put in a lump sum initially and then never add to it, and your money would still grow through interest payments.

Or you could add money whenever you have some spare.

Remember, the money is not able to be withdrawn until the child is 18, so you need to make sure it is money you are happy to wave goodbye to until then.

Even if you put in just £25 a month, or £300 a year, from the month your child was born until their 18 birthday, then David calculated that you could have as much as £7,890 when they turn 18.

This is calculated assuming that a stocks and shares ISA earns around 4% on average, and subtracts any typical fees.

If you put in £100 a month from birth, that figure rises to £31,559.

But if you have older children, it isn’t too late to start.

Even if you open a Junior ISA when the child is 10 and put in £25 a month, you would have £2,883 when they turn 18, David said.