A Junior Isa taught my son about saving... and gave him £8,000: How to engage your children with money and tap into rising rates or invest

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Parents and grandparents looking to help a child build a nest egg could benefit from increasing competition among Junior Isa providers in recent weeks, which has resulted in growing interest rates and shrinking fees on some of the best deals.

Cash Junior Isa returns have climbed as high as four per cent, with Coventry and Skipton building societies both offering this rate.

Hargreaves Lansdown threw down the gauntlet to stocks and shares Junior Isa providers by making its HL Junior Isas effectively free to manage.

On the up: Cash Junior Isa returns have climbed as high as 4% in recent weeks

Rival wealth platform Interactive Investor allows customers to open a Junior Isa for free as part of its Investor Plan or Super Investor plans. They can have as many free Junior Isas as they have children.

Investing platform Fidelity does not charge platform fees on Junior Isas.

If you have not checked your child’s Junior Isa for a while, it may be worth doing so. If you are paying a fee for a stocks and shares version or getting a rate much under four per cent on a cash Junior Isa, question whether you are still getting good value.

A Junior Isa taught my son about saving - and gave him £8,000 

Money lessons: Catherine Thomas Humphreys and Toby

A junior Isa offers a great opportunity to teach your child about money and the importance of saving so, hopefully, they won’t blow the cash as soon as they can access it.

Catherine Thomas Humphreys, from Chesterfield, used her son’s Junior Isa to teach him about saving. She opened the account for Toby, now 20 and a trainee paraplanner, when he was a child. By the time he could access it, he had an £8,000 nest egg.

‘Toby added to his Junior Isa with money he’d saved from birthdays and paper rounds,’ says Catherine.

 ‘When he turned 18, he spent some of his money, put some in emergency cash and kept the rest in Isas.’

Investment or cash: What's best for kids?

The only major difference between Junior and adult Isas is that only £9,000 can be paid into a Junior Isa every tax year, and they cannot be accessed until the child turns 18.

Children can have a cash or an investment Junior Isa – or one of each, so long as they don’t exceed the £9,000 limit. 

Cash Junior Isas are by far the most popular. But it is investment Junior Isas that tend to generate the biggest rewards over the long term.

For example, if you place the full £9,000 allowance into investments and assume an annual growth rate of five per cent, you would have £244,192 after 18 years. 

If you paid the same amount into a cash Junior Isa with an annual interest rate averaging 1.5 per cent, you would build a nest egg worth £197,634 over 18 years – £46,000 less. Interest rates on the best accounts are higher than this at the moment, but have been averaging around 1.5 per cent over the past few years.

Many children may choose to access their Junior Isa when they turn 18. 

However, if they left it untouched in a stocks and shares Isa and it continued to grow at five per cent a year, without further deposits, it would be worth £460,459 when they turned 30.

Leave it alone until the child is 65 and they would have retirement savings worth £2,539,901 – all of it protected from the taxman.

Sarah Coles, head of personal finance at Hargreaves Lansdown, says: ‘Parents may be wary of investments because they think of them as risky. But while there will be rises and falls in the short term, over the long term they tend to do better than cash.

‘Cash, meanwhile, runs the risk that it doesn’t keep pace with inflation.’

> The best Junior Isa cash rates: Check our savings tables 

Why do children need a tax wrapper?

If they earn more than £1,000 in interest in a tax year, they pay income tax on the excess. If their money is invested, they are subject to the same capital gains and dividend tax allowances as everyone else.

Anyone can pay into a Junior Isa, but a parent or guardian must open the account. They are a good option for grandparents who want to hand over money in their lifetimes, but don’t want their grandchildren gaining access before they turn 18.

Gifts are generally free from inheritance tax if the giver survives for seven years after making it.