ISAs have long been the savings account of choice for smart savers looking to earn tax-free interest on their capital. In November 2011 the government will launch Junior ISAs, a new form of saving account for children under the age of 18, allowing parents to put money aside for their children’s future with one simple, easy to use financial product.
How Will Junior ISAs Work?
The main difference between an ISA and any other form of savings account is that the interest accrued is exempt from tax and, whilst children’s savings are protected from tax to an extent, Junior ISAs will now allow you to make completely tax free savings for your child.
This is because Junior ISAs, unlike regular savings accounts, are not subject to ‘the £100 rule’, which states that any interest above a cap of £100 earned by a child’s savings is considered part of the parent’s earnings and taxed accordingly.
Do I Invest Cash or Shares?
Both Cash and Shares based options are available however, one of the biggest advantages of Junior ISAs is that, as children are entitled to one account of each type, you don’t have to choose between them.
This means that, if you are wanting the make the most of the opportunities for profit that the stock market offers, but are worried about tying your investment to the fortunes of the market, you can spread the risk by placing some of your funds in a cash ISA.
Whilst the lack or risk attached to the cash option is attractive (there is no way that your investment can loose value unless inflation rises quicker than the interest rate offered by your ISA provider) it is worth remembering that, traditionally, the value of shares has risen quicker than the rate of inflation. If you do go with a shares option you’ll find that, as the investment is so long term, some of the risk is taken out of the equation and that a poor performance one year can be redeemed over time.
Finally, funds can be switched between the two accounts, allowing you a greater degree of control over your investment.
Who Has Control Over the Account?
Whilst the parents are charged with managing the account and can, for example, move funds from a child’s Junior cash ISA to a shares based option, the extent of their control is limited.
Firstly, once funds have been paid into the account they are ‘locked in’ and cannot be accessed again by anybody other than the child whose name the account is in, and even they can only withdraw money once they reach 18.
Parents are also unable to control how or when their child will be able to access the money. On their 18th birthday the account will automatically become an ordinary ISA and control of it will be handed over to them. As a result they will have full and immediate access to all of the funds in the account.
Who Qualifies for a Junior ISA?
To a large extent Junior ISAs are being introduced as a replacement for Child Trust Funds, a type of government sponsored savings account for children which stopped running in January 2011. As a result only those born later than the 3rd of January will be eligible for a Junior ISA and any child that already has a Child Trust Fund will not be allowed switch over to the new form of account.
Children born before the introduction of Child Trust Funds in September 2002 are the exception to this rule, which is great news as parents whose kids missed out on the CTF era will be now able to have a Junior ISA instead.
Who Can Set Up a Junior ISA?
It is down to the parents rather than the government to set up a Junior ISA and, unlike the Child Trust Funds, the government will not help you to start up the account or contribute funds to it, the exception being looked-after children. (You can find about rules such as these in more details by reading the treasury’s draft regulations.)
Children are also able to set up Junior ISA accounts for themselves once they reach the age of 16.
How Much Can I Pay Into a Junior ISA?
Parents, Grandparents or anybody else with an interest in the child’s future can pay up to a total of £3,600 a year into the account (although it is worth checking here for the latest ISA allowances), a significantly larger figure than the £1,200 that could be paid into a Child Trust Fund. This means that, if you have funds available to invest, more of your child’s nest-egg will be tax exempt than ever before.
Who Has Control Over the Account?
Whilst the parents are charged with managing the account and can, for example, move funds from a child’s Junior cash ISA to a shares based option, the extent of their control is limited.
Firstly, once funds have been paid into the account they are ‘locked in’ and cannot be accessed again by anybody other than the child whose name the account is in, and even they can only withdraw money once they reach 18.
Parents are also unable to control how or when their child will be able to access the money. On their 18th birthday the account will automatically become an ordinary ISA and control of it will be handed over to them. As a result they will have full and immediate access to all of the funds in the account.
Where Will I be Able to Get a Junior ISA?
Junior ISA will be available from November 2011 onward and will be provided by the vast majority of mainstream lenders, such as high-street banks and building societies.
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