The Children’s ISA started life in 2011 when Junior ISAs were introduced and we have been at the forefront of the industry since their inception. But not all ISAs are created equally. We thought we would use this opportunity to compare Junior ISAs with their adult counterparts because, like humans, the junior and adult versions are in essence the same but also fundamentally different.

The basics: 

Let’s first start with analysing what an ISA, more broadly is. An ISA is an Individual Savings Account and is a tax-efficient way of saving money. It allows you to save into one or more accounts, up to a certain limit each year without incurring any tax liability on the interest or capital gains that the account earns.

Tax-free differences: 

Now let’s move on to Junior ISAs (or JISAs). A Junior ISA, in principle, works much like an adult ISA. Both Junior and adult ISAs come as either Investment or Cash vehicles. The main difference is the tax-free savings allowance: with a Junior ISA, you can save up to £9,000 a year compared to an adult ISA where you can invest up to £20,000 per annum. The other fundamental difference is that a named individual (usually a parent or guardian) will have responsibility for the ISA until the child reaches adulthood.

Investment profiles and ownership:

When opening a Junior ISA, the parent or guardian will determine which type of product to invest in on behalf of the child. So they will choose the type of Junior ISA (Cash vs. Investment) and also, in the case of an Investment Junior ISA, the type of risk they want to be associated with. In the case of a Junior ISA, from the Children’s ISA, the levels of risk are determined as defensive, balanced or adventurous. It’s important to remember that even though parents make all the investment decisions for Junior ISAs at first, the money legally belongs to the child at all times. This means that when the child turns 18, they have the option to spend the money as they please or continue to save or invest it. 

The joy of compounding:

Assuming that a Junior Investment ISA has opened on behalf of a child from birth the fundamental advantage it will have over an ISA opened by an adult is a combination of time and compound interest. 18 years’ worth of compounding, even with small regular amounts invested could deliver a substantial nest egg for the child. We have developed a handy little calculator here so you could see how much an investment could be worth (based on historical performance).

When it comes to Adult ISAs, being a grown-up comes with financial pressures that can often mean money is withdrawn or the account is used as a savings vehicle which doesn’t always work optimally. So though an Adult ISA will also benefit from compound Interest, in reality, the investment will not vest for as long as a Junior ISA, given the temptation to withdraw the funds. However,  if managed correctly and with regular contributions, an adult ISA can be a fantastic place for long-term savings. Regarding contribution limits, the £20,000 per year limit should provide more than enough flexibility for most savers and investors.

So there you have it, much like their adult contemporaries Junior ISAs come in cash or investment form. Given the benefit of time, compounding interest and regular investment, a Junior ISA should make a smaller person very happy when they get bigger and are ready to make their own savings and investment decisions.