Should I use a Junior ISA or my own allowance when saving for my kids?

“Should I use a Junior ISA or my own allowance when saving for my kids?"

I overhead someone ask this question recently, and thought the topic warranted exploration.

When it comes to saving for a child’s future, a Junior individual savings account (ISA) may seem the obvious choice. Your offspring get a tax-free sum of money the day they turn 18, and HMRC can’t touch any future gains, dividends and interest.

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But as with any important financial decision, there are some things to consider first.

In certain instances, using your own ISA instead of a Junior one might be a more suitable option. Let’s examine some of the key things to think about.

How do Junior ISAs and adult ISAs compare?

It’s fairly common knowledge that ISAs can be a great way to invest for the future. As noted above, the money grows free from capital gains tax (CGT), and any dividends and interest are tax-free too. And the tax advantages can be enjoyed by people of all ages, including children.

Anyone aged 18 or over can save and invest £20,000 into ISAs every year, while you can contribute up to £9,000 a year into a Junior ISA for each child. These allowances are separate, so a couple with two children would have a combined yearly allowance of £58,000.

If you’re a grandparent, although you can’t open a Junior ISA for a grandchild, you can add to it once the account has been opened.

Once your child reaches age 18, their Junior ISA transfers into the adult version, where they then manage the money themselves. This could involve withdrawing some or all the holdings and spending it on “stuff” .

How comfortable am I with my kids accessing the money at age 18?

This is one of the main considerations when choosing between a Junior ISA and your own allowance. You might not be comfortable with your child getting their hands on the money the day they hit adulthood.

While it’s unlikely your child will take all the cash out and squander it, the savings would be held in their name, so they have complete discretion over how it’s used. You might, for instance, plan for them to use the money to support them through higher education, but they don’t have to.

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It’s worth noting that the sums they inherit could be sizeable, especially if you save hard over many years.

If you were to invest the full £9,000 allowance (paying in £750 a month) from the year the child is born, assuming the money grows at 5% a year after charges, they could have a whopping £264,000 in tax-free savings once they turn 18.

Using your own ISA allowance means that the control remains in your hands, allowing you to pass the money on when you see fit.

Do I max out my own ISA every year?

This is one of the biggest sticking points for those who wish to use their own ISA.

While only a small proportion of investors max out their £20,000 ISA allowance every year, some still do. And to use your own allowance to save for your kids you must have some spare, unless you’re willing to sacrifice your own financial goals.

If you and your spouse, partner, or civil partner max out your ISA allowances every year, any additional investable funds would likely go into something like a general investment account (GIA), which do not attract the same tax advantages as ISAs. You will likely pay tax on any gains, dividends, and interest on this portion of your portfolio.

What if I need the money personally at a later date?

Life has a habit of throwing up the unexpected, which can potentially put our long-term financial plans into jeopardy.

Parents of all ages face the tricky balancing act of supporting their children’s futures without compromising their own.

As a recent Pension and Lifetime Savings Association report underscores, the cost of living comfortably in retirement is rising sharply. If you’re still working, this means you may have to increase savings or risk reaching later life with a shortfall, while if you’re retired you may have to think twice before bequeathing your retirement savings to avoid running out of cash.

One of the major upsides of ISAs as opposed to pensions is that you can access the money whenever you want, without penalty and without a tax charge. So, while you may be saving for a specific goal, if you urgently need some cash for any reason – perhaps you or your child become seriously ill, and you need to pay for specialist medical treatment – you can raid your own ISA.

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However, this option is off the table if the savings are held in a Junior ISA as the money is locked in until age 18. You may of course be fine with this and have adequate savings, investments, and protection policies earmarked for financial emergencies. You could also see the lack of access as an advantage, as it removes the temptation to dip into savings that are set aside for your child’s future.

But if your family finances are less affluent, you may require more flexibility over your combined savings and investments to ensure that the money is put to best use at the right time.

How might my decision affect inheritance tax?

If you pay regularly into a Junior ISA, it’s unlikely there will be any inheritance tax (IHT) implications. Gifts from surplus income typically avoid IHT as long as you can prove it doesn’t affect your standard of living.

However, if you save and invest into your own ISA, then choose to pass this money to your child in the future, as the gift will be from capital rather than spare income, you may have to survive seven years before the money moves outside your estate. Your decision is unlikely to hinge on this aspect but it’s something worth knowing.

Should I invest a child’s money in cash or shares?

Whether you opt for a Junior ISA or to use your own allowance, you still need to decide how to invest the savings. This choice is generally narrowed down to two asset classes: cash and stocks & shares (though bonds also fall into the latter).

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Put simply, if the goal that you are saving and investing for is more than five years away, the stocks and shares version is likely to deliver better returns. This isn’t guaranteed, but half a decade should be ample time to ride out the highs and lows of the stock market.

You can always switch from shares to cash when your child’s investing goal moves closer, known in industry jargon as de-risking, to protect the savings should markets fall sharply shortly before they plan to use the money.

You can always do a bit of both….

The good news is the decision isn’t binary. There’s nothing to stop you using both a Junior ISA and your own ISA savings. For example, you could funnel a modest amount into Junior ISAs, but also invest some in your own name to retain some control.

Needless to say, whichever route you choose will provide a massive boost for your offspring.

The financial challenges facing young adults are arguably harder than ever: house prices and university costs have soared, and the task of saving enough for retirement is getting tougher with each passing year. Any financial support you provide can make a real difference to your child’s future.