JISA: The perfect gift

For too long many parents, grandparents, aunties, uncles and family friends have felt the dread that comes with buying gift for children. So should we start to challenge the long held belief that giving cash as a gift is lazy? Yes, it may not take as much thought and imagination to gift money as hunting down the latest bestselling toy, but it has the potential to be much more valuable.

Instead you could consider opening a Junior Individual Saving Account (JISA) for your children as an alternative gift. And if you’re a family member or friend, you could contribute to an account that has been set up by the parent.

Here are answers to some of the key questions you may have about JISAs before you decide if it’s the right thing for you to replace toys for the next generation.

What is a JISA?

JISAs are long-term, tax efficient savings accounts for children which were introduced in November 2011. They allow parents to set up an account to put money aside for their children’s futures until they reach the age of 18 when they are able to decide what they want to do with the savings for themselves.

What are the different types of JISA?

Just like a standard ISA, there are two types of JISA – Cash JISAs and Stocks and Shares JISAs. A cash JISA is essentially a savings account which holds cash and earns interest on that cash holding. This interest rate will differ depending on the provider and is likely to vary over time, although you might be able to get a fixed rate for leaving the money in one place for a period of time.

A Stocks and Shares JISA holds investments. Hopefully the value of these investments grows over time which would increase the value of the account, although this is not guaranteed. These investments could also potentially earn money by paying dividends which can either be held as cash or used to buy more shares.

A child can have one or both types of JISA as long as the combined amount doesn’t exceed the annual JISA limit each year and they are equally great ways to introduce children to the value of saving and investing at an early age.

Which type of JISA is right?

This will depend on individual circumstances. We spend all our lives trying to keep our children safe so it’s natural to err on the side of caution when it comes to investing for them too. The lower risk option is to open a Cash JISA on their behalf.

A Cash JISA works in the same way as putting money into a bank or building society. The account earns interest on the money you or your loved ones pay in but without any tax deductions. This might be more suitable if you are opening a JISA for an older child who is only a short few years away from accessing the account.

At the other extreme, opening a JISA for a very young child a Stocks and Shares JISA may be the better option. As they could be investing over a longer period of time, they may be more able to withstand the highs and lows of the stock. This can provide a greater potential long-term return than a Cash JISA, however they come with more risk.

Using diversified funds balances the risk of investing by spreading investments across a range of asset classes to reduce extreme highs and lows. Of course, with any stocks and shares ISA, there is a chance that the value of children’s savings can go down as well as up and they might not get back money paid in.

Who can open a JISA?

Both parents and legal guardians can open the accounts for children and remain in control until the child turns 16.

Anyone can pay into the account though up to the annual allowance, making it easy for family members to add money as gifts, not just at Christmas, but birthdays, Christenings, or as a ‘well done’ at any time of year.

Is there a limit to the number of JISAs I can open?

You're only allowed to have one Cash JISA and one Stocks and Shares JISA open at one time.

Many providers will allow you to transfer an existing JISA to them. It’s also possible to transfer between the different types of JISA.

What is the JISA allowance for this tax year?

In the 2022 to 2023 tax year, the savings limit for JISAs is £9,000. This allowance can be split between a Cash JISA and a Stocks and Shares JISA, so you can invest in both for your child.

Allowances can't be rolled over to the following year, so if the allowance isn’t used within the tax year it will be lost.

How much money do I need to invest to open a JISA?

This depends on how you intend funding the JISA. You can pay in regular instalments or through lump sum investments whatever is best for you. Your provider will set out the minimum amounts for each method but you can, of course, pay in more as long as you don’t breach the annual limit.

Can I withdraw money from a JISA?

No, any money invested in a JISA belongs to your child and cannot be touched until they’re 18. The only exceptions to this is if your child were to become terminally ill or die.

If you’re unsure of whether ‘locking in’ the money held in the JISA until your child’s 18th birthday is right for you, you may want to consider alternative options for saving for their future.

When will my child get access to the money?

When your child reaches the age of 16, they take control of the account but they cannot withdraw anything from it until their 18th birthday.

When they become 18, the JISA automatically becomes the equivalent adult ISA. The adult ISA annual savings limit of £20,000 will apply from that date.

At this point the child is entitled to all the assets from the JISA. They can choose to continue saving in the adult ISA, transfer to a different type of ISA, or withdraw any cash and investments as they wish.

How much money will my child receive?

Depending on how long you have been saving into a JISA, and whether it is in a Cash ISA or a Stocks and Shares ISA, the amount of money your child has access to could be significant when they come of age.

The amount of money that your child will have access to when they reach the age of 18 will depend on how much has been saved or invested over the years. If you open a JISA when your child is born and they’re lucky enough to receive the full £9,000 savings limit every year of their life, they could be sitting on a whopping fortune of £229,434*. Not bad for an 18 year old, but that’s the beauty of compound interest.

Compound interest is like growth on growth, through reinvesting interest rather than paying it out. Although as with all investments there are risks so this is not guaranteed.

It’s worth preparing your child for their imminent windfall by educating them about the reasons why you invested on their behalf throughout their childhood and the options available to them. While you may have had visions of the money being used for university fees or a deposit for a house, your child may have very different ideas.

But you don’t have to save as much as £9,000 per year for your child to receive a generous nest egg on their 18th birthday. By investing just £50 a month from when your child is born, their JISA could be worth £15,295* when they come of age. That’s got to be more impressive than the latest PlayStation or Xbox.

Please note these are examples only and investors should remember this is not guaranteed, The value of investments and the income from them can fall as well as rise and you may not get back the initial amount invested.

* All figures based on a 5% expected growth rate and 1.25% annual charges over 18 years.

How do I move a Child Trust Fund (CTF) to a JISA?

Child Trust Funds (CTFs) were savings accounts that were available for children born between 1st September 2002 and 2nd January 2011. These accounts were used by parents to deposit two cash vouchers that the Government gave for every child. The value of the vouchers were £250 for most families, or £500 for low income families.

You can no longer open a CTF, but just like a Junior ISA, it allowed parents to save money and earn tax-free interest for their child. So, should you move your child’s savings from a CTF to a JISA?

This will depend on individual circumstance and it’s worth bearing a couple of things in mind. Firstly, not all providers allow you to transfer from a CTF to a JISA so do your research first. You may also wish to consider the timing of the transfer. Investments of any kind should be viewed over the long term (generally more than five years) so if your child is 13 or over it may be worth keeping the money where it is or opening a Cash, rather than a Stocks and Shares, JISA.

You may also decide to keep the CTF open, but note that your child can’t hold both a JISA and a CTF at the same time.

So save yourself the trouble of wrapping presents from now on and open a JISA for a valuable present that your kids could benefit from for years to come.