Choosing how best to save for your child’s future can be a confusing business. With so many options available, can be hard to know where to put your money. We’re here to help by breaking down the differences between saving in a Junior ISA and a cash savings account.
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Saving for your child’s future
A recent study by NatWest found that 83% of UK parents are saving for their children in cash. The good news is that they are saving for the future. The bad news is that savings may be eroded by inflation.
In fact, the numbers showed that just 23% of parents are saving for their children via a Junior Stocks and Shares ISA. Instead, nearly half (46%) have simply opened a cash account.
Nick Johnson, Investing journey lead at NatWest, explains: “starting a Junior ISA for a child is a really great way to give them a head start at the age of 18 and, as they get older, teach them about the benefits of saving for their future.”
Let’s take a look at the pros and cons of saving in a Junior ISA and a cash savings account.
Junior ISA
There are several options when it comes to childrens’ savings accounts, one of which is a Junior ISA. There’s a cash version or a Stocks and Shares option.
There are some general pros and cons when it comes to a Junior ISA.
Pros
- It is tax-efficient. Much like the adult version, any gains made in a Junior ISA are tax-free.
- If you are looking for a long-term savings vehicle, it fits the bill. The money is locked in until your child turns 18.
- The money belongs to your child, giving them a strong financial start in adulthood.
Cons
- The tax-free allowance is relatively low at £9,000 a year (2021/22).
- Your child can’t touch the money until their 18th birthday.
- You cannot withdraw any money to put into other savings options. Instead, you need to make a transfer to another Junior ISA.
Talking specifically about a Junior Stocks and Shares ISA, there are some other advantages – especially considering the current low interest rates and rising inflation.
A Stocks and Shares ISA can help to offset the impact of inflation. It works well as a long-term savings vehicle and can be an affordable alternative to cash savings.
Obviously, investing carries risk. But there is a potential for long-term returns that could outperform inflation. However, it is important to pick a Junior ISA with a risk profile you are comfortable with.
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Cash savings
While a Junior ISA is good as a long-term savings option, you may find yourself wanting something that is a bit more accessible. Therefore, a cash savings account may suit your needs better.
There are different options available. For example, with an instant access account, your child can withdraw or deposit money at any time. A regular savings account could encourage regular deposits.
Pros
- You can withdraw money whenever you like, unless otherwise stated on the account.
- It could be used as a good way to teach your child about money, allowing them to manage their own savings.
Cons
- You may have to pay tax on the savings interest.
- Interest rates tend to be lower than you could earn with a Stocks and Shares ISA.
