The pros and cons of Junior Isas

This article is part of
Guide to paying fees for education

The pros and cons of Junior Isas

Many parents want the best for their children, and this includes being able to afford for them to go onto further education when they reach the age of 16 or 18.

There are plenty of stories about graduates leaving university saddled with debts that run into tens of thousands.

Saving into a Junior Isa in anticipation of these types of education fees may seem like a good idea.

The annual Junior Isa allowance is £4,260 and, like an adult Isa, parents can either open a cash Jisa or a stocks and shares Jisa.

Adrian Lowcock, head of personal investing at Willis Owen, points out the main advantage of the Junior Isa is it allows parents to begin saving and investing for their child right away.

“This allows parents to lay the foundations for their child’s financial future by granting long-term tax-free savings or investments,” he says.

“Previously, if a parent invested or saved money for their child, any interest earned on savings above £100 would be taxed under the parents’ allowances, capital gains and dividends would also fall under the parents’ tax wrapper, unless the investment was made in a more complex trust.

“Income or investment returns generated by a Junior Isa do not count towards a child's tax allowance – effectively any income or capital gains can roll up tax-free.”

Kay Ingram, director of public policy at LEBC Group, agrees the Jisa is a tax-efficient way of passing money onto children – “especially if the parent has already used their own adult Isa allowance of £20,000 per tax year”.  

She explains: “Any money saved by a parent on behalf of their minor child is usually taxed as their own income, apart from the first £100, so the tax exemption for income and growth on Jisas is helpful where parents have no tax-free savings allowances of their own and would otherwise be taxed on the savings.”

Encouraging contributions

Another advantage of opening a Junior Isa for your child is that other family members or friends can make contributions into it.

Rather than asking for the latest toy or video game from relatives, parents could encourage a financial contribution to their child’s future.

Myles Edwards, membership director of Foresters Friendly Society, points out the generous annual Junior Isa allowance means “a family can save a sizeable sum for a loved one when they reach 18 and may be off to university”.

Any parents taking out a Junior Isa should be aware that the child can take control of the account when they turn 16 and then start withdrawing money from the age of 18.

This is also one of the potential disadvantages of the Junior Isa – ultimately, it is up to the child how they spend those funds.

When their parents opened they Isa, they may have had in mind all the money saved into it would pay for university. But when their child turns 18, they may have other ideas.