How will the new Junior ISA savings scheme work?
By Kate Saines
Anyone mourning the loss of the child trust fund and keen to find a simple tax efficient way to save for their children’s future will be delighted to hear the Junior ISA will be available from November.
But while these new ISAs are being hailed as the way forward in instilling a firm savings culture in society, can people really afford to save at a time when budgets are tighter than ever?
There will of course be plenty of families who will benefit greatly from the Junior ISA’s introduction, but for all the winners there will also be losers. The question is - are Junior ISAs really all they are cracked up to be? Make your mind up for yourself...
How will Junior ISAs work?
The new accounts will work in exactly the same way as traditional ISAs. In other words, they are savings accounts which allow you to deposit cash and earn interest without paying tax on the gains you make.
Each child will have a limit of £3,600 per year, which is obviously less than the allowance for the ‘grown up’ ISA.
However, they will be allowed to have one cash ISA account and one stocks and shares ISA, if they wish, so they could potentially have two ISAs running at the same time.
Once opened, the account will be owned by the child. While they will not be able to access the money until they are 18, when they reach 16 they will be allowed to start making decisions on how the ISAs are run.
In general the structure of the Junior ISA has been well received. Original plans for the accounts had mooted a £3,000 limit, making the announcement of the £3,600 allowance music to the ears of many people.
Roger Thompson, head of UK business at JP Morgan Asset Management, said the increased limit was good news for savers and the industry alike.
He added: “The figures speak for themselves. Our calculations show 18 years of investing £3,600 every year, with five per cent return per annum, would mean a savings pot worth over £100,000 by the time the child turns 18 – a substantial nest egg.”
Also welcomed was the fact the annual limit for Child Trust Funds will now rise in line with the Junior ISAs, leaping from £1,200 to £3,600 on November 1st.
Who can open a Junior ISA?
So far, so good. But this is where it gets contentious. As of November 1st all children under 18 who have not been eligible for Child Trust Funds (CTFs) will be able to open a Junior ISA.
This means babies born on or after January 1st, 2011 when the CTF was axed, and children born before the CTF launch date in September 2002 will be allowed to take out the Junior ISA.
This is obviously great news for those who missed out on CTFs. In fact the government expects six million children will be eligible for the accounts, with a further 800,000 being eligible each year.
Unfortunately, anyone who qualified for a CTF, and therefore received the government voucher, will not be able to open a Junior ISA or even transfer funds from the CTF to the ISA, a detail which has not gone down very well.
Critics argue, with CTFs off the radar, they will suffer from a lack of attention which will make them uncompetitive.
Kevin Mountford, head of banking at Moneysupermarket.com, said: “With the lack of focus on CTFs, the danger is children with these accounts will languish on poor deals, while those with Junior ISAs will benefit from competition in the market.”
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What are the advantages?
We’ve already highlighted the higher annual allowance, the obvious tax benefits and the fact that all those children who could not open a CTF will now have a savings vehicle to help provide for their future.
But what the Junior ISA is also doing is creating a flurry of excitement among finance professionals, buoyant at the prospect of a new product to engage children in saving.
Ian Sayers, director general of the Association of Investment Companies (AIC), said: “What will be important will be encouraging more parents to devote what they can to building a nest egg for their children’s future.
“Ideally Junior ISAs should be linked to financial education in the classroom, and this is particularly appropriate given that children will be able to manage their accounts from 16.
“Financial education would help foster a savings culture and teach children that regular saving, even with more modest sums, can make a real difference over the longer term.”
Meanwhile Catherine Penney, investment and tax specialist at Barclays Stockbrokers, said at a time of rising fees for university or the need to build significant savings for a start on the property ladder Junior ISAs offered a great opportunity for friends or relatives to contribute.
Read more: How do savings bonds work?
What about the disadvantages?
There is a fundamental feature of the CTF noticeable by its absence from the Junior ISA, namely the government contribution. While those eligible for the original CTF were given an incentive to invest via a £250 voucher (later £50 when the government phased out the scheme), no such sum is being offered with the ISA.
This will come as no surprise to anyone who has been keeping a close eye on government spending reviews. But it will naturally come as a disappointment to anyone for whom the £250 was a crucial element, not to mention the motivation, to them opening a CTF.
It begs the question that without the voucher appearing on the doorstep of every parent of a newborn, whether many people will bother investing in the new ISA.
Finding even £10 to kick-start a child’s ISA could be a struggle for many families in today’s recession-hit UK.
What’s more, as already mentioned, children with existing CTFs cannot transfer their savings to an ISA. And there are fears the CTFs will suffer from a lack of competition.
There has been talk that Junior ISAs and CTFs may merge in the future, however.
How will I get access to Junior ISAs?
Currently Junior ISAs are not available, although many banks, building societies and other providers have come forward to announce they plan to offer them in November.
Family Investments, a prominent player in the CTF market, has announced it plans to offer an investment Junior ISA which will allow parents to invest in the stockmarket by depositing as little as £10 a month.
And it is also offering an ethical Junior ISA. Meanwhile, fund management company Fidelity has revealed it will be providing Junior ISA customers with the chance to invest in its range of funds and investment trusts as well as having access to 1,200 other funds via its fund supermarket.
Legal & General and Lloyds have also announced they will be providing accounts. Expect, in November, for the market to be flooded with products. It’s likely you’ll be able to walk into your own bank and find Junior ISAs on offer.
How can I make the most of my child’s ISA?
The Junior ISA market looks set to be a busy one. So when they are introduced it will be well worth doing some research into the best rates and products on offer.
Kevin Mountford of Moneysupermarket said: “Generally, children’s savings rates are low across the market so anyone saving into a Junior ISA should be prepared to shop around for the best deal and ensure they switch regularly in order to maximise the return when the child turns 18.”
As with traditional ISAs, everyone agrees it’s essential you take full advantage of the tax benefits available.
Catherine Penney, investment and tax specialist at Barclays Stockbrokers said: “It is crucial that people make the most of their annual tax-free ISA allowance, and appreciate that it really is ‘use it or lose it’ as each tax year passes.”
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