If you had a child born between 1st September 2002 and 2 January 2011 then you benefitted from the government funded Child Trust Fund which gave every child a £250 voucher to start them off. These funds were unfortunately stopped by the Coalition Government in 2011 although those with existing trust funds can still pay into them. Children’s ISAs were launched in the same year and although the government do not contribute anything towards them, they were set up with the same principle as the CTF, to encourage families to save for their children’s financial future.
A Junior ISA (JISA) works in much the same way as an adults; you can save a certain amount each year tax free, which means that the interest you accumulate on your savings will be yours to keep, none of it will go to the taxman.
When the Children’s ISA was first rolled out in 2011 the maximum amount you could put in for them, tax-free, was £3,600 and this ISA allowance will most likely rise each year in line with inflation. What this means is that you can top up their ISAs each year by the maximum amount. You don’t have to provide a lump sum to do this, you or anyone else such as a family member or friend, can make regular or one-off payments throughout the year.
No new funds can be opened but existing CTFs can still receive tax-free savings. The amount you can put into a CTF is the same as an ISA but unfortunately interest rates for funds are generally lower and at this moment in time it is not possible to transfer a CTF into a JISA or open a separate ISA for the same child, although the government will consider the possibility of tying CTFs more closely in with JISAs.
This is where your investment is tied into the stock market with the level of risk dictated by you. Many Junior ISA Providers offer varying levels of risk although you need to remember that even the lowest risk accounts can go down and the child may end up getting less back than was originally saved.
The good thing however is that you can mix and match between investment and savings, putting less in one and more in another depending on how well they are doing. So long as you don’t go over the yearly amount, this could be a good way of getting the money to work harder, especially in the long-run where traditionally investments tend to perform better than savings.
When you compare junior isa accounts you will realise that as with any savings accounts there are always strengths and weaknesses so it’s only fair that we list the main ones:
Whatever you decide to do, saving up for your children’s future is now considered a necessity if you want to give them a financial advantage and those savings do go down better when you know that the taxman can’t touch them!
Resources: For the official Junior ISA regulations please visit the UK’s Direct Gov website here.
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.
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.
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.
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.
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.
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.
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.
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.
ISA simply stands for ‘Individual Savings Account.’
There are two are two types of ISA – Cash ISAs and investment ISAs.
A cash ISA is like a normal savings account but offers the following key benefits:
An investment ISA is a tax efficient wrapper for your investments which have certain qualifying criteria. (I.e. You must be at least 18 for an investment ISA and resident and ordinarily resident in the UK for tax purposes.)
If you deposit funds in an investment ISA (also known as a stocks and shares ISA), your money will be invested in the stock market.
Investment ISAs are free from capital gains tax and income tax but the tax credit on dividend income received is not reclaimable. Investment ISAs have the potential to outperform cash savings but you need to be aware that, as these ISAs operate within the stock market, their value at any given time can fluctuate as returns depend on the performance of the underlying investments – so you can lose money as well as make money.
Before moving your money, you may want to consult your financial adviser to identify the best ISA deals and investment plan to suit your needs.
Remember, eligibility for ISAs depends on your individual circumstances, and the rules around them – such as their tax treatment – could change in the future.
All UK nationals have an annual ISA allowance of £10,200.
It’s important to think about your attitude to risk before investing in an investment ISA because the returns are not guaranteed, and you may end up with less money than you originally put in because the value of investments can go down as well as up.