If you are looking for the best junior cash ISA out there then make sure you look at the small print. With a lot of junior ISAs paying paltry interest rates then it pays to shop around, to benefit from the power of compounding interest over time. As a guide if you are getting less than 2.5% (which seems to be the sweet spot for junior ISA accounts), you can certainly do better.
The Halifax Junior Cash ISA offers a headline grabbing 4% interest on junior ISA balances over £1. But this rate is only on offer if an adult Halifax cash ISA is held or the child is 16 and over.
But the Halifax own cash ISAs (NISAs) don’t pay market leading rates. Given that you can put £15,000 cash in a NISA, you will be better off getting a better rate on your own NISA rather than trying to keep everything with Halifax
Take their ISA Saver online which pays 1.25% AER. You can comfortably get 1.6% equivalent elsewhere by shopping around. If you used your full £15,000 NISA allowance that’s an extra £52 interest a year you’d be giving up just to secure an extra 1% (i.e £40) interest a year on the Halifax Junior Cash ISA (assuming you put the maximum £4,000 in this year). So in effect you’d be paying Halifax to get a better rate on your Junior ISA!
Having said that, if you don’t have a Halifax ISA then the junior ISA rate starts at 3% which is still one of the best rates out there.
But you can get better…….
Nationwide and Coventry Building Society both offer junior ISAs paying 3.25% AER. While neither use the the dreaded ‘bonus’ rate tactic they are variable which means is that they can drop the rate at any time, although Nationwide guarantee to not cut the rate below 1.15% before 31st January 2015 - hardly exciting! If you want to operate the account online then the Nationwide Smart Junior ISA is the one to go for. But if you want to transfer existing junior ISA savings in then the Coventry Building Society Junior Cash ISA is your best bet.
What about if you want to save and forget?
The other thing to point out is that there are limited range of Junior ISAs out there and even fewer offering a fixed deal. Of the few that do you are looking at around 1.9% AER for a 1 year fixed rate - so there is absolutely no point doing it.
But do people really need to take out junior cash ISAs?
The big positive of junior cash ISAs are that they are tax free. But don’t forget that interest on children savings accounts can be paid tax free if you complete an r85 form when opening a standard children's savings account. This is because children get their own income tax personal allowance. The one caveat is that if the money paid in came from a parent then if the account earns over £100 interest a year then it is taxed at the parent’s marginal income tax rate. But if a grandparent, for example, is paying in then this rule doesn’t apply. So keep an eye on children’s savings account rates in case you can do better elsewhere. Those thinking of paying small regular amounts in each month (£10 to £100) might want to look at the Halifax Kids' Regular Saver account which offers 6% AER gross for the first 12 months.
But if you or a spouse do not pay tax on savings interest then you could get a decent rate yourself. You could start saving via a high interest bearing current account, for example, with the best ones out there paying 5% AER (you can find the best rates here). For a basic rate tax payer that still works out at 4% per annum. There are even fixed rate bonds paying over 3%. Plus you keep control of the money as it’s in your name, unlike junior ISAs where you lose control of the money when the child hits 16 and they can withdraw the money at age 18.
There's nothing to stop you saving outside of a junior ISA to get a better rate, even after tax, and then moving the money into a junior ISA over time, being mindful of the annual contribution limits.
Best Stocks and Shares Junior ISA
If you want to invest the money via an investment junior ISA then the most important thing is to keep costs low otherwise they will eat into your nest egg. Compare annual charges as well as fund and dealing charges. Plus remember to check the transfer in and out charges (you may want to move away from the provider in the future).
Then look at the availability of funds. Some providers offer limited choices in this regard but the flip-side is that their overall costs are usually lower. Unfortunately there is no one investment junior ISA which is best overall. Those not bothered about investment choice might be attracted to the likes of Family Investments Junior ISAs which only offer a choice of two funds but charge around 1.5% per annum. If you plan on investing up to the maximum amount each year and want investment flexibility then look at the Investment Junior ISA offered by investment platforms such as the likes of AJ Bell or Hargreaves Lansdown*, which offer
access to thousands of funds, but keep an eye on the charges.
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