What’s the best savings account for my baby?

Mouthy Money Your Questions Answered panelist, Sarah Coles, answers a reader’s question on the pros and cons of opening a Junior ISA for their new baby.

Q. I’ve just had my first baby and I’m looking for a savings account to open for her, is a Junior ISA the best option?

A. Putting aside a nest egg for a new baby can make an enormous difference to them later in life.

The Junior ISA (JISA) has some incredibly useful benefits because you can save or invest up to £9,000 a year on their behalf, and it will grow completely free of tax. However, there are some questions you need to ask to make sure it suits you:

Will they need to get their hands on it before the age of 18?

A JISA is tied up to the age of 18, so if you want them to be able to spend it as they grow up, it may not suit them. If you want to save this in cash, you could consider a children’s savings account instead – which tends to pay a higher rate than the adult equivalent.

If you want to invest, you could consider a bare trust, which lets you make withdrawals at any time as long as they’re for the benefit of the child.

Is the money coming from parents?

If it is, a JISA is particularly valuable, because it’s always tax-free. By contrast, if you save in your child’s name, or invest through a bare trust, and income from interest or dividends is £100 or more, the money is treated as belonging to you, so it’ll be taxed as yours.

Do you want to have control?

When your child hits the age of 18, everything in a JISA belongs to them. It means supporting your child to make good decisions, but ultimately it means trusting them.

At 18 they may decide the money is best put towards their university fees or a house deposit, but they could also use it for a long holiday – ultimately it belongs to them, and they can do what they want to with it.

If you’re saving for the long term, is a savings account the best home for your money?

You can use a cash JISA, which is essentially a tax-efficient savings account. However, you should at least consider a stocks and shares JISA instead.

The value of investments will rise and fall in value over the short term, but over the long-term stocks and shares can take advantage of the growth in the stock market – which has tended to grow faster than cash.

Are there any inheritance tax considerations?

Grandparents may be keen to give away money today, to take advantage of their annual inheritance tax allowances, or to get the clock ticking on a larger gift – which will only be out of their estate after seven years.

However, they may be nervous about putting their money in the hands of grandchildren in case they make poor spending decisions. The JISA offers a useful solution, because it ties the money up to the age of 18, so it can be given away today, but only gets into the hands of the child at the age of 18.

Sarah Coles has been an analyst with Hargreaves Lansdown for the past five years, after spending 14 years as a financial journalist writing for publications ranging from Bloomberg to AOL Money. Her areas of expertise include savings and financial planning – covering everything from tax to borrowing, spending and the housing market. She is also co-presenter of HL’s ‘Switch Your Money On’ podcast. She is passionate about encouraging people to get to grips with every aspect of their finances, not because finance is inherently fascinating to everyone, but so they have enough money for the things that really matter to them in life.

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