Junior ISA or Child’s Pension – which one has your vote?

Winston Churchill once said: “Saving is a fine thing. Especially when your parents have done it for you.” Yet, with the financial challenges faced by today’s younger generations, what was once an aspiration is increasingly becoming a necessity.

When it comes to saving for your child, there are three common objectives that parents have in mind: helping fund the cost of university; raising a deposit for their first home; or starting their own retirement fund. The alternative to getting into the savings habit is a bigger outlay by the Bank of Mum and Dad later down the line.

Get into the savings habit early to give your child a head start

“Whatever the goal, children have one big advantage on their side: time,” says Sam Fitzgibbon of Pinnacle Wealth Management. “Depending on when you start, and when you finish, saving for 18 years plus gives your money a fantastic opportunity to grow and build a pot to give the kids a very healthy head start. But only if it’s invested wisely.”

The default option for many parents and relatives, when saving for children, is to utilise a cash savings account with a bank or building society. Whilst this is a flexible way to put money aside, the returns will be eroded by inflation over time, which could severely deplete the ‘real’ value of your precious gift.

Instead, the two most common options with the potential for longer term, tax-efficient growth are Junior Individual Savings Account (JISAs) and a Child’s Pension. But which is best?

There is no clear winner. Both are tax efficient as they are not subject to Income Tax or Capital Gains Tax on any investment growth. However, an eligible contribution to a Child’s Pension also receives government tax relief of 20%, so if you pay in the maximum annual amount of £2,880, then £3,600 is actually invested.

On the other hand, a JISA allows you to contribute up to £9,000 in this tax year per child. Although someone with parental responsibility must set up either scheme, anyone can pay into them, as long as the annual allowance per child is not exceeded.

Both a JISA and Child’s Pension can be invested in stocks shares, but using a tax-efficient wrapper doesn’t ensure investment success. “HMRC figures show that 60% of JISA subscriptions go into cash¹, so the long-term, tax-efficient growth potential risks not being maximised by parents taking the safe option,” adds Sam. “Cash saving is clearly a hard habit to break.”

What makes them very different are the rules on accessibility. Once your child reaches 18 years old, you’ll no longer be able to pay into a JISA for them, and they can access the funds from that date. With a pension, your child can take control of their plan from age 18, but the funds cannot be touched until they reach 55 (57 from 2028).

The goals you have for your child are therefore a key consideration, but there’s a lot more to the decision about which savings option is the right one. That’s why it’s important to take advice about the best way to support your child financially and build that springboard for their future.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested

An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

¹Annual Savings Statistics, HMRC, June 2023′

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