Is a junior Isa right for your child?

Using a “junior Isa” is an effective tax-free way to save for your child – but parents should beware the pitfalls of these accounts.

A junior Isa works the same way a normal Isa does – it allows a certain amount of money to be put aside each year and it earns interest without being liable for tax.

But it does not offer the same degree of flexibility as other Isas do, with the money inaccessible until your child turns 18.

And at that point, only your child can get hold of the money – you will have no legal say over what happens to it.

That might be fine for some families, but others could take the view that the parents (and other relatives) who have saved the money throughout the child’s life want to have some say over what happens to the cash.

Charlotte Nelson, of Moneyfacts.co.uk, said: “Once the child turns 18, the junior Isa is automatically transferred into a normal adult Isa, protecting any tax-fee benefits.

“However, money held in a junior Isa cannot be accessed until the child turns 18, and only the child can access it. Perhaps the biggest concern for parents is the fact that when the child turns 18, the parents have no say on how the money set aside is spent.”

So what are your options?

Well, the good news is there are other dedicated children’s accounts out there. They are not technically tax-free, but given that children do not already have salaries, the interest they will earn means they are unlikely ever to trouble the tax threshold.

“When opening a children’s account, you will be asked to sign an R85 form so your child will receive gross interest without any tax deduction,” said Ms Nelson.

“Restrictions can vary between the account being held in trust by an adult, to the parent having to authorise the withdrawals made and sometimes proving the withdrawals being made are for the benefit of the child.”

You will also need to decide whether you want instant access to the money or if you are prepared to tie it up for a bit longer.

Ms Nelson said: “Some children’s accounts allow you the flexibility to dip in and out of the savings, but often the best accounts restrict access. As with adult savings accounts, the best rates are usually over a fixed-term period.

“You should assess whether your child will need access to the money in the meantime, and then make sure you get the most suitable account.”

As with all financial products, spend a little time shopping around to find the best deal – and try not to be enticed by any upfront gifts, as accounts that offer “freebies” often have lower returns.