Saving money for the future is fundamentally important for everyone in the UK and the general rule is that it is never too early to start saving. Children can be taught about saving money from a young age by their parents. They will encourage them to put away a portion of their babysitting money or other money earned so that they learn the value of saving for the future.
Parents, grandparents, relatives and friends can also start children off on the right path to financial solvency by starting a saving account for those kids.
For parents who are interested in investing for their children’s future, a new option has recently become available. This option is a junior ISA. It provides some significant benefits in terms of maximizing money saved and interest earned and opening one can be a great choice for the kids.
What is an ISA?
Simply put, a junior ISA is an ISA account that is intended for minors. ISA accounts allow for people to place up to a set maximum amount of money in a special savings account each year, which grows tax-free. This means that when you are paid interest on the money in the account, you do not have to pay taxes on this interest, as you normally would for invested money or for gains and returns on investments.
Since you do not have to pay taxes on the interest earned in an ISA, you keep more of the money that your account earns for you. This helps the magic of compound interest to work, as the interest gets added to the principle and it in turn begins to earn interest.
How Do Junior ISAs Work?
A traditional ISA is opened for the adult who is contributing money, but junior ISAs work a little differently. They are opened by parents or relatives for the benefit of a child. Money can then be deposited into the account by those who want to give a gift to the child.
The maximum amount of money that can be deposited into this account for each child each year is £3,600 as of 2012, but this amount is subject to change and increases with annual cost of living adjustments determined by looking at the Consumer Prices Index.
When the money is deposited into the ISA, it can be invested in a cash account, or in a stocks and shares account that allows for investments to be made. Regardless of what particular type you choose, it will enjoy significant tax benefits, as the money earned from the growth of the account will not be subject to tax.
Control of a Junior ISA
Parents who open the account for their children will have control over the account. When a child turns 16 years of age, control of the account may be turned over to the child from the parents. However, in the vast majority of cases, kids probably won’t cash out or take control of their ISAs. Instead, the intent is for kids to convert the junior ISA into a traditional adult ISA upon their 18th birthday and then continue to contribute and save in the account. Of course, children can cash in the account when they turn 18 as well, but keeping the junior ISA and transferring it into an adult account where they continue to save is a better idea for their future.