The best cash ISAs – August 2023
Easy access and notice ISA rates are now at their highest since 2009. Here are the best cash ISAs on the market today.
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Parents have been using junior individual savings accounts (ISA) to save for their children’s future for over a decade. But most of them are making a mistake that could cost them thousands of pounds.
Since their introduction, in 2011, junior ISAs have grown ever more popular. In the 2020-2021 tax year almost one million junior Isas were opened, according to HMRC. A similar number had been opened in the previous three years too, illustrating the enduring appeal of these tax-free accounts.
The ins and outs of Junior ISAs
The attraction of a junior ISA is that the money is tucked away for the long- term: it can’t be accessed – unless circumstances are exceptional – until the child turns 18. And it can grow tax-free.
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The latter may seem irrelevant for a child unlikely to be earning enough to pay income tax, but it is more of a problem than you might think. There are strict rules governing children’s savings accounts to stop parents using them as a tax shelter for their own money.
If a parent puts money into a non-ISA children’s account and it earns more than £100 of interest a year, the returns will be taxed at the parent’s income-tax rate. By contrast, junior ISA returns are tax-free regardless.
If you build up substantial savings for your child, then when they are old enough to start working, they could start having to pay tax. However, save it into a junior ISA and, when they turn 18, the account is automatically converted into an adult ISA, so it continues to be protected from the taxman.
The limits on junior ISAs are that a child can only hold one cash junior ISA and one investment junior ISA at a time. You can move their accounts if you find a better rate, but you’ll need to close the old account and transfer the balance to the new one.
Furthermore, you can only deposit up to £9,000 per tax year into a junior Isa. This can be split across a cash junior ISA and an investment junior ISA. It’s also worth noting that any money paid into a junior Isa then belongs to the child. When they turn 18, they can access it – and spend it – whenever they like.
Don’t make this mistake with your Junior ISA
So, what is the mistake so many parents are making with junior Isas? The problem is opting for a cash junior ISA.
“Most families can benefit from the fact that money is locked away until a child turns 18, giving them time to ride out stockmarket volatility and reap the benefit of long-term investing through a stocks and shares junior ISA,” says David Nottingham, personal finance expert at NFU Mutual. “However, only 30% of junior Isas are invested this way.”
Since 2005, the MSCI World index has returned over 10% a year. By contrast, cash has averaged an annual growth rate of just 1.5%. So, putting your money into a cash junior ISA means you could be missing out on significant investment growth.
This is particularly important at present when inflation is soaring. With inflation currently at 10.4% and the best rate on a cash junior ISA just 4%, you will lose purchasing power on cash savings.
“Leaving the money in cash, particularly in the current inflationary environment, is a sure-fire way of locking in a guaranteed loss of spending power,” says Dan Brocklebank, head of Orbis Investments UK.
The best Junior ISAs
If you are looking for a cash junior Isa, the best rate you will find is 4% from both the Skipton and Coventry Building Societies. The latter’s account can be opened and managed in person or by post or telephone; the Skipton BS does not offer the phone option.
If you want an account that can be operated online, you can get 3.80% from The Cumberland Building Society or 3.75% from the Monmouthshire Building Society. All these accounts allow transfers from existing cash junior ISAs. The rates are far better than those seen in recent years, so check what your child’s existing cash junior Isa is earning and consider moving it.
When it comes to an investment junior ISA, all the major investment firms offer junior ISA accounts, so which one is right for you and your child will come down to what you want to invest in and whether you want to take charge of building a portfolio or pick a ready-made one.
One of the cheapest options is Fidelity’s junior ISA. It doesn’t charge a platform fee, keeping your costs down. With its Fidelity Personal Investing Cost Focus you can select from five ready-made portfolios depending on how risky you want your investments to be. The average annual costs on the investments are 0.29%.
Keen stockpickers could opt for Fidelity’s self-invested junior ISA. You can choose from more than 3,000 funds and trading them will cost you nothing, but you’ll pay a hefty £10 a trade for shares. A better option if you want to invest in individual shares regularly is Hargreaves Lansdown’s junior ISA, with low trading fees of £5.95 and a 0.45% per annum platform fee.
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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