Junior Stocks & Shares ISA vs cash savings

Confused about savings accounts for children? We break down the pros and cons of a Junior ISA and a cash savings account.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Father playing guitar on the floor with daughter sitting beside him.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

[top_pitch]

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.

[middle_pitch]

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »