Why ISAs are perfect for parents

ISAs are perfect for parents

From university fees to first homes, costs are high for young people today so what better way to set up your child for the future than by opening an ISA for them. They’ll benefit from tax breaks and be able to watch their money grow - but is it a better option than a savings account and how do you choose between cash or investment ISAs?

Pros and cons of an ISA for saving for children. 

How much do children need to save?

There are lots of things children - or in most cases parents or guardians - must pay for. From the everyday expenses of having a child to bigger things such as childcare costs, school trips, and university fees.

In fact The total cost of raising a child to the age of 18 now stands at £160,692 for a couple and £193,801 for a lone parent, according to the Child Poverty Action Group (CPAG).

When a child turns 18 there are also costs to consider. You may want to help your child out with the deposit for their first house, or give them money for travelling, a gap year, or help them while they’re at university.

There are lots of costs to consider and the best way to prepare for these is to start saving early. Putting money away regularly can make a real difference to the size of your child’s saving pot when they reach the age of 18.

What are the benefits of a savings account for a parent?

There are different options when it comes to finding a savings account for a child. You can choose from the following:

·      Junior ISA

·      Child savings account

·      Adult savings account

·      Adult ISA (cash or investment)

Each account will have different rules on how much can be put away, when it can be withdrawn, and the tax benefits. On the whole it’s usually wise to find an account that pays the highest rate of interest. 

You’ll be looking for long-term savings, especially if your child is young, and you may want to consider an investment option. Over the long-term investments tend to perform much better than cash savings, yet there are risks too so you will need to weigh up all the pros and cons before opening an account. 

Is a child or adult account better for saving?

You can either take an adult savings account out and put money into it for your child, or they can open their own child account.

The thing to look for here is the interest rate, as you’ll want to find an account which pays the highest rate available. This is hard at the moment, given how low interest rates are, but it’s worth searching for an account with a high rate to make the best return on the money.

Children’s savings accounts - if they’re not ISAs - are taxed but given that most children don’t have any other income, they can earn a significant amount of interest before paying any tax. In most cases they won’t pay any at all.

This is because they, like everyone, has an allowance of £12,570 which can be earned before tax is due, plus a £1,000 savings allowance which they can earn in savings interest before paying any tax. There’s also the starting rate for savings which is £5,000. You can find out more about tax on savings at Gov.uk.

Is a Junior ISA still worth investing in? 

The benefit of a Junior ISA over any other savings accounts is the fact it’s tax free. Parents, or other friends or family members, can put up to £9,000 a year into the account without paying tax on any interest earned or capital gains.

They’re definitely a popular option too. In 2019 to 2020, £971 million was subscribed to Junior ISA accounts, around 61% of which was in cash, according to HMRC. The average amount in a Junior ISA was £5,740, a 5% decrease on the 2018 to 2019 figure.

Money saved into a Junior ISA doesn’t affect a parent’s own ISA allowance - of £20,000 per tax year. 

Once a child turns 18, they are then free to spend the money how they would like to.  There are cash Junior ISAs and stocks and shares Junior ISAs. On the whole the latter tend to generate higher returns, as the money is invested in the stock market. 

However, money can’t be taken out of the account until the child turns 18. This means if there was something else the money was needed for, it couldn’t be used. Choosing a cash Junior ISA is also a bit of a dangerous game. This is because over 18 years any growth in interest is likely to be eroded by inflation.  

There are other options to consider. A standard ISA - either a cash ISA, a stocks and shares ISA or an IF-ISA could be considered as an alternative place to put money for a child. These can still offer good returns but can be a little more flexible if you did need the money for another expense to do with your child. 

However, a benefit of a Junior ISA is that the money can’t be touched so no matter what happens the child will still have that savings pot when they turn 18.

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All the facts and figures presented are accurate at the time of posting.

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