Junior ISAs or premium bonds: how should you save for your child's future?
If you’re thinking of saving money for a child in your life, there’s several ways you can do it.
Junior ISAs (JISAs) and premium bonds are both tax-free savings options. That means that the child you give them to won’t pay any tax on any money they make – no matter how much it is.
So, in 18 years when they need the money, it’s all theirs.
There are also two types of JISA to choose from: cash or stocks and shares. Whether you choose to buy premium bonds or invest in a JISA (and what type) depends on your situation and how much risk you want to take with the money.
In this article, we’re going to go through the key differences between the three products to help you decide.
Junior ISAs vs premium bonds: how do they compare?
| Stocks and shares junior ISAs | Cash junior ISAs | Premium bonds | |
|---|---|---|---|
| How do they make money? | Value goes up and down depending on the stock market | Earn interest like current accounts do | Monthly prize draw determines how interest is shared |
| Who can open or buy for the child? | Only the parents or legal guardians of the child | Only the parents or legal guardians of the child | Any adult |
| Who can pay in? | Anyone | Anyone | Anyone |
| What is the age limit? | Child must be under 18 (under 16 for a OneFamily Junior ISA) | Child must be under 18 | Child must be under 16 (but anyone can buy premium bonds in their own name) |
| When can the child access the money? | When they turn 18 | When they turn 18 | Anytime |
| What is the minimum investment? | Dependent on provider (from £10 for a OneFamily Junior ISA) | Dependent on provider | £25 |
| What is the maximum investment? | Up to £9,000 a year | Up to £9,000 a year | £50,000 in total |
What are junior ISAs?
JISAs are accounts that can be opened in a child’s name by someone with parental responsibility for the child. Anyone can put money into an open JISA but only the child can take money out and only when they reach 18.
There are two types of JISA – cash or stocks and shares – and these grow in different ways.
A cash JISA earn interest like current accounts do, whereas money in a stocks and shares JISA is put into funds that are invested in the stock market.
What are premium bonds?
Premium bonds are a savings product sold by National Savings and Investments (NS&I) on behalf of the UK government. Each premium bond costs £1 and you can buy up to 50,000.
The money that you use to buy premium bonds technically earns interest but the amount of interest your own premium bonds get is literally based on luck. Rather than it being divided equally, a prize draw decides how the interest is shared each month.
Each premium bond has an equal chance of winning. The top premium bond prize is £1 million and there are a variety of smaller prizes down to £25 – so the more premium bonds you own, the greater your chances of winning.
You could therefore win more interest than you would get in a savings account, but you could win nothing at all.
What are the similarities between junior ISAs and premium bonds?
JISAs and premium bonds can both be used to put money away for a child’s future. The two products are both designed to ideally leave the child with more money than is paid in. There are two key similarities:
- Junior ISAs and premium bonds are both tax-free
No matter how much money you put into a JISA, or how big the premium bond prizes are, the child won’t pay a penny in tax.
- Junior ISAs and premium bonds can be given as gifts
Both JISAs and premium bonds can be gifted. This means parents can open a JISA or buy some premium bonds in the child’s name.
This means only the child will be able to take money out of their JISA (when they reach 18). However, despite the child “owning” premium bonds in their name, their parent or legal guardian will be responsible for them until the child reaches 16, so they can sell the bonds at any time.
Grandparents can’t open a JISA for their grandchild unless they are their legal guardian, but they can put money into one that the child’s parents have opened. Alternatively, grandparents can open a children's tax-exempt savings plan (like our OneFamily Junior Bond) for their grandchildren.
What are the differences between junior ISAs and premium bonds?
- They make money in different ways
Premium bonds have grown in popularity since the Covid-19 pandemic. They can be an exciting option as each month there is a (very small) chance of winning a lot of money. For every £1 of premium bonds you own, the odds of winning the top prize of £1 million is 1 in 56,199,445,087, according to MoneySavingExpert.
Smaller prizes are more likely, but the only guarantee is that your money won’t go down. If you don’t win any prizes at all, it is worth keeping in mind that while you will have the same amount of money in 18 years’ time, this will be worth less as it won’t have grown with inflation.
JISAs are less exciting and come with a bit more certainty.
Cash junior ISAs earn interest like current accounts do and can’t go down to less than you put in. Stocks and shares JISAs, on the other hand, are invested in the stock market so they do have the potential to grow more than cash JISAs. In every 10-year period since 2000, stocks and shares have out-grown interest rates*, but there’s still a risk the value of your investments could go down if the stock market doesn’t go our way.
Our junior ISA calculator can give you an idea of how much money could be in the account when the child turns 18.
- The minimum and maximum amount you can invest is different
You can put up to £9,000 per tax year into a JISA. If you open a JISA when the child is born, you can therefore invest up to £162,000 if you put in the maximum each year for 18 years. Some providers ask you to pay in a minimum amount, at OneFamily this is just £10 a month.
You can buy up to £50,000 of premium bonds in total. These can be bought all at once or a few at a time. The minimum you can buy is £25.
- Not everyone can invest in junior ISAs
Only parents or legal guardians can open a junior ISA for a child, although anyone can pay into it. Anyone over the age of 16 can buy premium bonds for a child – they don’t need to be related.
- There are different rules about withdrawing money
Only the child named on the JISA can take money out, and only when they reach 18.
For premium bonds, no matter who bought them for the child, only their parent or legal guardian can sell them before the child turns 16. When they turn 16, the child can sell them.
What are the risks with junior ISAs and premium bonds?
- Premium bonds: while you can’t lose any money when you invest in premium bonds, there is a risk that you won’t win anything at all and your money won’t grow. The same amount of money will be worth less in the future as inflation causes cost-of-living to increase.
- Cash JISAs: as with premium bonds, you can’t lose any money when you save with a cash JISA. Your money will grow by earning interest. However, if interest is lower than inflation then it also might not keep up with cost-of-living rises and could be worth less in the future.
- Stocks and shares JISAs: there is a risk that stocks and shares JISAs can lose money, although they also have a much higher potential to grow in value and keep up with inflation than cash JISAs do.
Weighing up your options
However you decide to do it, putting money aside for your child or grandchild can open doors for them when they reach adulthood. It can also be a handy way to help you save on inheritance tax.
With premium bonds, you have the thrill of potentially gifting them £1 million but this is very, very unlikely.
When it comes to JISAs, your returns are still not guaranteed, but if you open a cash JISA then your money will grow with interest rates. If you go with a stocks and shares JISA, you have a greater likelihood of substantially increasing the amount of money you’ve invested, but there is a chance that the value might go down.
OneFamily's Junior ISA
With our stocks and shares Junior ISA you can start investing from just £10 per month up to a maximum of £9,000 each year on behalf of a child. Anyone can pay in, and the child will gain access to the account once they are 18 years old.
*Source: Barclays GILT study 2023.
Find out more about junior ISAs
How do junior ISAs and premium bonds make money?
- Premium bonds: a monthly prize draw is used to share out the interest.
- Cash JISAs: earn interest like current accounts do.
- Stocks and shares JISAs: money is put into funds which are invested in the stock market. They increase or decrease in value depending on how the stock market does.
What would you like to do next?
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