Junior individual savings accounts, or JISAs, are tax-efficient saving or investing tools for children that were first introduced in 2011. 

While the child’s parent or legal guardian would open and take control over managing the JISA, the money wouldn’t be accessible until the child turns 18 years of age (however, they can manage their account from 16). 

JISAs are also extremely popular because they offer tax-efficient savings that are entirely free of income tax and capital gains tax, meaning that all of the money earned will belong to your child. 

What’s more is that Junior ISAs appear to be paying off for many youngsters in the United Kingdom already. 

According to a recent Freedom of Information request, some 400 of the 2,170,000 JISAs held in the UK have a value of over £100,000.

Compounding plays an intrinsic role in empowering more savers to grow their Junior ISA balance further, and it’s one of the most effective ways to grow your investments in a tax-efficient way. 

Building Your JISA

So, how can compound interest help to enhance your child’s Junior ISA? Let’s take a deeper look at how JISAs work and why compounding is so valuable. 

Firstly, there are two types of Junior ISA available. You can open a Cash JISA, which holds cash savings and earns interest that’s loosely based on the Bank of England’s base rate. Or, you can opt for a Stocks and Shares JISA, which holds investments and can also earn dividends tax-free

Your child can hold a maximum of one Cash JISA and one Stocks and Shares JISA at any time, but you wouldn’t be able to invest more than the annual JISA allowance of £9,000 in them combined. 

A child can have up to one of each type of JISA, as long as the combined amount doesn't exceed the annual JISA limit.

Crucially, while a JISA must be opened by either a parent or legal guardian for the child, there are no restrictions on who can contribute to the account if the provider facilitates it, meaning that grandparents and even friends can make a deposit and grow its savings or investments. 

Allowing more individuals to contribute and help the JISA reach its £9,000 tax-free allowance each year can also hold many advantages when it comes to compounding. But why is compounding so important for Junior ISAs and just about any other form of individual savings account? The answer is that compounding is the most effective way to get the most tax efficiency for your money. 

The Benefits of Compounding

With it possible to contribute up to £9,000 per year in a Junior ISA, it’s possible to make significant compounded savings even with smaller regular investments. 

For example, if you contribute £100 per month, it’s possible to end up with £14,866 after 10 years due to the effects of compounding. If you then decide to keep the money invested for a further five years, your return could reach £24,433. This means that upon turning 18, your child could have a significant nest egg for the best possible start to adulthood. 

Even if you were to leave £1,000 of savings untouched over five years, it would be worth £1,276.28 when assuming an annual interest rate of 5%. 

It’s possible to bolster the compounding effect of a Junior ISA further by opting to open a Stocks and Shares version of the individual savings account, which will allow you to reinvest your profits over time. 

This means that one of the biggest advantages of a JISA is that your money is locked away until your child turns 18, meaning that it will be in line for compound interest for many years into the future, creating a cycle of growth that needs little oversight.

Compound Interest After Maturity

So, what happens when your child turns 18 and has the ability to access their Junior ISA funds? The great thing about JISAs is that the journey doesn’t have to end just because the account matures. 

Once your child reaches 18, the Junior ISA maturity process will be initiated by your provider. In many cases, a JISA will automatically mature into an adult ISA, which offers a higher annual allowance of £20,000. 

However, the funds are free to be spent or reinvested as your child sees fit. If they choose to continue saving, then they can open the door to even greater levels of compound interest over the years ahead. 

Crucially, your child will have also gained first-hand experience of compound interest in action, helping to accelerate their levels of financial literacy and showing them the benefits of saving over long periods. 

The Junior ISA is an excellent way for parents and guardians to provide their children with the best possible start in life. But it also helps to provide a comprehensive overview of compound interest that can lay the foundation for far more opportunities to grow their wealth in the future, making it a highly valuable investment tool in more ways than one.