Like its adult equivalent, a Junior Isa (Jisa) offers a tax-free way to save for a child's future. But Which? has found that building a nest egg for a youngster is not as easy as it looks on paper.
Our analysis showed just over 30 cash Isa products are Jisas, with no sign of growth. We also found more than a quarter of all cash Jisas impose restrictions and half, overall, are only available to open and manage in branch or by post.
Here, we take a deep dive into the Junior Isa market and look at some of the barriers which young savers face.
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What are Junior Isas and why open one?
Children are liable to pay tax on savings, as they have the same income tax allowance as adults. There's also the '£100' rule to prevent parents using their own tax-free allowances as a way of cutting down their bill to HMRC. A Jisa, however, allows parents to save up to £9,000 for their child every year, without paying a penny to the tax man.
Similar to adult Isa accounts, you can choose between opening a cash product or invest in stocks and shares. Either way, the money is locked away until a child turns 18 – at which point it converts to an adult Isa and the young person has full control over the money.
New rules from April 2024 that allow savers to hold and pay into multiple Isas of the same type in the same tax year don't apply to Jisas. So you can still only hold one cash Junior Isa and one investment Junior Isa at any one time.
Shopping around for the best place to invest money for a child's future can be daunting. But our research has found that choice is made even harder for parents looking to take advantage of tax-free savings. Here are some of the main obstacles we found to opening and investing in cash Junior Isas.
Less choice of cash options
We looked at Moneyfacts data at three points in time – 25 May 2022, 26 May 2023 and 25 June 2024. Our analysis found the adult cash Isa market is booming, with the number of accounts up 7% over a two-year period. After they dipped a little last year, they rose by 16% between 2023 and 2024.
In contrast, parents expecting a similar range of Jisas to choose from will be disappointed. We found almost no change in the number of cash Junior Isa accounts over the last two years. There are just 33 deals currently on the market, compared to 32 in 2022 and 33 last year.
Choice of provider is also limited. Unlike the adult cash Isa market, where the lion's share of the top rates are offered by challenger banks, savers opening a Jisa will need to opt for a building society if they want the best rate.
When we looked at Jisas by rate, we found eight of the top 10 accounts in 2022 were offered by building societies, while every single top rate account last year and in 2024 comes from a building society. The adult cash Isa market, in contrast, had just one building society account in the top 10 in 2022, none last year, and four this year.
Case study
‘I opened a Jisa to teach my son about saving’
Four years ago, Steve Matthewson decided it was a good time to open a savings account for his son Thomas. Not just because he wanted to put something extra aside for his future, but also because the 15-year-old was ready to learn about building a nest egg.
The 54-year-old father from Surrey opened an investment Jisa because of the lack of cash options and the product's long-term growth potential at a time when interest rates on other savings accounts were rock bottom. While he admits starting earlier would have probably yielded bigger returns, he says teenagers are more likely to understand how a Junior Isa works and why it's important.
‘At the time, Thomas felt a sense of ownership of the account. It's not just something that his parents started when he was a toddler and it's just happening in the background,’ Steve explains. ‘We started off with around £400 then put in small amounts, like £50 or £100 every two or three months. Now it's worth several £1,000, not a lot really, but seeing it grow has been exciting for him.’
Even though Thomas is now 19 and a student at university, he hasn't been tempted to dip into the funds which are now in an adult stocks and shares Isa. Steve believes that financial education nurtured a savings habit that he hopes will continue in later life.
Many products come with restrictions
The good news is, rates on cash Junior Isas are currently soaring. All accounts offer interest higher than the current rate of CPI inflation (2%), with the top rate almost three times more.
But savers looking for a high interest product may be less impressed to find some of the best deals have limits on who can open them.
For example, many accounts can only be opened by people who live in the provider's local operating area. Our analysis of Moneyfacts data on 25 June 2024 revealed more than a quarter (27%) of all cash Jisa accounts on the market impose this restriction.
We also found 39% of deals with above average rates – more than 4.16% AER – were limited to residents of certain postcodes. The top two best accounts from Beverley Building Society (5.5% AER) and Bath Building Society (5.49%) are also only available to locals.
Access can be limited
Even if you do find a Jisa that can be opened by anyone, anywhere, you may be faced with other barriers to setting up the account.
We found that more than half (52%) of all cash Jisas can only be opened and operated in branch or by post only. Four accounts require savers to do everything in branch, including Nottingham Building Society's Junior Isa, which has the fourth best rate on the market at 4.85% AER.
There are only a handful of cash Jisa accounts that can be opened and managed online or by app. But three out of those seven options – products from Bath Building Society, Cumberland Building Society and Northern Ireland's Danske Bank – are only available to local residents.
Unlike many adult savings accounts currently on the market, no Junior Isa has the option to open and operate solely by mobile app.
How do top rate Junior Isas compare?
This table, ordered by rate, gives you an idea of how many top cash Jisa deals currently restrict opening of accounts according to location and place limits on access.
Accounts
AER
Any restrictions?
Access
Beverley Building Society Junior Cash Isa
5.5%
Only available to people living in a DN, HU or YO postcode
Branch and post only
Bath Building Society Junior Cash Isa
5.49%
Restricted to children who live, work or study in Bath, or whose parents, grandparents or legal guardian have been a Bath Building Society customer for at least the past 12 months
Branch, internet, app
Coventry Building Society Junior Cash Isa*
4.95%
None
Branch, post, phone
Nottingham Building Society Junior Isa
4.85%
None
Branch only
Loughborough Building Society Junior Isa
4.8%
None
Branch, post
Source: Moneyfacts. Correct as of 25 June 2024 but rates subject to change. *Coventry Building Society is a Which? Recommended Provider. Find out more in our guide to the best cash Isas.
Choosing online means sacrificing interest
If you don't meet the opening criteria, live near a branch or simply want more flexibility in how you manage an account, you'll need to look for a product that offers online access.
But there are just two accounts on the market which allow savers to open and manage their cash nest egg online. These come from National Savings & Investments and Tesco Bank, both with a rate of 4% AER.
Halifax's Junior Isa – with a rate of 3.65% AER – can be opened online, but you can only manage your money and view the balance in branch. The cash Jisa from Santander (3.2% AER) must be opened in branch, but does have the option of using online and mobile banking once the account is set up.
Rates on all these accounts are far lower than those with restrictions on opening and managing cash. That gap in interest can make a big difference.
For example, let's say you open a Junior Isa for your child paying the current top rate of 5.5% AER. If you were to invest the full £9,000 annual tax-free allowance as your opening deposit and don't touch it, you will have earned £495 in interest after 12 months. However, put the same money into a Jisa with a rate of 4% and it will only grow by £360 after a year.
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Despite only being around since 2011, the Junior Isa (Jisa) has seen a surge in popularity. The latest data from HMRC shows the number of subscriptions to these tax-free accounts rose more than a quarter year on year – from 955,000 in 2020-21 to 1.2 million in 2021-22.
So why aren't providers stepping up to meet this demand?
Well, despite increased customer appetite for Junior Isas, just £1.5bn was paid into Jisa accounts in the 2021-22 tax year, and of that 42% went into cash accounts. In comparison, the adult Isa market saw £67bn of assets paid in during the same year.
The junior market is therefore relatively small for a big financial organisation, so many providers simply don't see the value of offering the product to customers or getting involved in the associated admin of being an Isa manager.
Laura Suter, director of personal finance at AJ Bell, explains that many organisations instead focus their efforts on offering standard children’s savings accounts. She says these tend to be very popular with parents, but many often aren’t aware of the potential tax pitfalls of not using an Isa account.
Research from AJ Bell, conducted in January 2024, found half of parents surveyed had no idea how tax worked when it came to the interest earned on their children’s savings. Equally worryingly, a fifth of parents thought that any interest from their child’s savings account was tax free – which is not the case.
Conversely, there are lots of options for investment Junior Isas, with most investment platforms offering the accounts. They can be used to buy and hold shares, funds and other types of investments.
While a cash Isa and investment Isa will offer you the same tax-free benefits, there can be a big difference in the returns you get back. That's because investment Isas are more suitable for long-term growth, despite dips in the markets meaning your balance will drop on occasions.
A cash Junior Isa may have a high rate today, but remember interest on these accounts was pitifully low for years before 2023. Now that inflation has fallen to 2%, many analysts predict the Bank of England will start reducing its base rate in August or September 2024 and savings rates will probably start falling again in response.
To get an idea of how volatile cash savings interest can be, look back at May 2022 when the base rate was just 1%. The average rate on a Junior Isa on 25 May 2022 was a measly 1.83% AER.
The disadvantage of an investment Junior Isa, however, is that some or all of the money you're saving for your child could be lost, if investments don't perform well. For example, some investments, such as company shares, are more volatile than others, such as bonds.
But given that your money could stay invested for 18 years if you set up a Junior Isa soon after your child is born, you'll be able to hold out through dips in value of your investments.
'Generally speaking, the longer you stay invested the better', advises Megan Thomas, investments writer at Which?. 'If you have a longer time frame for your investment though, you’re more likely to be invested during more of the market’s best days – when value significantly spikes – which is going to drive the most growth in your investments.
'You’ll also hopefully be able to ride out any waves of economic downturns and other external factors that bring down the value of your investments in the shorter term.'
She adds that if you’re investing in a stocks and shares Isa for the first time, you need to know how much risk you’re willing to take on.
'Investing broadly – for example across different parts of the world, as well as a mix of different assets, like investment funds or trusts, stocks, and bonds – will help you to not invest in a riskier way than you should.
‘I opened a stocks and shares Jisa to beat high inflation’
Last year, Which? employee James Attew opened two stocks and shares Junior Isas through investment platform Nutmeg for his daughters Chloe, aged five, and three-year old Emily. He says the market has been fairly buoyant and his investments have seen returns of about 14%.
The 38-year-old solicitor from Wales explains he was attracted by the idea of a stocks and shares Jisa, as opposed to cash, because of soaring inflation – the CPI measure peaked at 11.1% in October 2022 and was still almost 7% in July 2023.
‘My daughters had recently come into a small legacy and I was conscious that I was safeguarding these monies for them until they came of age,’ he says. ‘If I had kept it in a cash savings account, even with a reasonable interest rate, the spending power of the money in 13 to 15 years would likely have been significantly eaten away by inflation.
‘Although with stocks and shares Isas the capital is at risk, given I was investing for a period of more than 10 years, I take the view the likelihood over that period of time is that the investments will appreciate in value. But worst-case scenario if it all goes wrong, I will repay to them any monies I have lost!’
What about child trust funds?
An estimated 6.3m child trust funds (CTFs) were set up between 2002 and 2011 to encourage young people to become future savers. If a parent or guardian was not able to set up an account for their child, HMRC opened an account on the child’s behalf. All deposits and returns were tax-free.
Anyone – parents, family and friends – can pay in up to £9,000 a year until the account reaches maturity when the child turns 18. At this point, they can either withdraw the funds or reinvest the money into another savings product.
If nothing is done with the money the CTF provider will either transfer it to an Isa, if they offer one, or they will transfer it into a 'protected account' until the account holder gives further instructions. It will remain tax-free.
Because some of these accounts were set up automatically, many have been forgotten and are lying dormant. If you don't know the details and to track your CTF down, you can ask HMRC to find the provider by filling in an online form. To do this, you'll need to follow these steps. You'll need to have set up a Government Gateway account.
How else can children save?
If you've used up your child's tax-free options or you want to access the money before they turn 18, banks and building societies also offer non-Isa savings accounts for children.
Children can open most of these accounts themselves from age seven, so it's a great way to get them involved.
Watch out for catches such as introductory bonuses, limits on withdrawals, maximum or minimum account balances, and investment charges (if you opt for a stocks and shares account).
Providers often offer free gifts such as a piggy bank, but don't be distracted – focus on getting the best return – and check on the progress at least twice a year.
You could also consider investing in things like premium bonds, traditional investments or even saving for your child in a pension.
This article was updated on 4 July 2024 to amend a line which incorrectly stated that savers could open multiple Junior Isas of the same type in the same tax year. In fact, that rule – which came into force from April 2024 – only applies to adult Isa accounts.
