Junior ISAs: kick-starting the savings habit?Posted on: 31 October 2011 by Nick McBreen
Tax-free children's savings accounts (Junior ISAs) launch on 1st November 2011. The new accounts offer grandparents a an easy way to safeguard a grandchild's future.
The Junior ISA launches on the 1st November, after much fanfare from the government. It all sounds good at first glance - a children's version of an Independent Savings Account (ISA), with a tax-free contribution allowance and access allowed when the child is aged 18. And the £3,600 a year contribution which parents or guardians, or other family and friends, can make to the ISA is higher than the previously announced £3,000. Children who missed out on the Child Trust Funds can hold a cash Junior ISA and a stocks and shares Junior ISA.
So, looking at the tax benefits, it seems a good idea, but on closer inspection there are a few things we think are worth considering before you open one on behalf of your child. There are also other options you can consider when it comes to investing for and on behalf of your children.
First of all, the reasons for introducing the Junior ISA in the first place were to replace the now defunct Child Trust Funds (CTFs), which were phased out this year. Junior ISAs have a larger contribution allowance than CTFs, but do not have any contribution from the government. It's also not (yet) possible to transfer existing CTFs into a Junior ISA, nor can a child hold both, although there have been murmurings from the government suggesting that in time CTFs and Junior ISAs might become more closely aligned.
One of the main criticisms of the CTFs was that they gave children access to a potentially large amount of money at the age of 18, to do with whatever they wanted, which was something that raised alarm in many parents. In a worst case scenario, it provided the potential for a child to have amassed a fund which parents might have intended for something like driving lessons or higher education, and instead is blown on a racing car, or worse.
This potential problem of easy access to money does not appear to have been solved by the Junior ISA. Until a child reaches 16, whoever has parental responsibility for them must manage the ISA. At the age of 16 a child can, if they choose, take control of the ISA. And at the age of 18, the Junior ISA automatically becomes an adult ISA and the child can have full access to the funds it holds. That seems a lot of financial responsibility at a young age, especially considering that the Junior ISA could accumulate a fund of £100,000 if parents paid in the maximum amount allowed every year from birth until the child reaches 18, assuming growth of 5% a year (1).
Promoting financial responsibility and encouraging saving could be a potential advantage of the Junior ISA and supporters have argued that it provides the opportunity to create the savings habit early on in children, but you don't have to have a Junior ISA to do that.
You also get the main advantage of the Junior ISA with other investments, which is the tax efficiency. As with adult ISAs, the Junior ISA allows tax free growth and contributions up to a certain limit, £3,600 in the case of the Junior ISA which is lower than the current adult ISA level of £10,680. You can just as easily open an ISA in your own name and give money to your child from that as and when it's required. Offshore bonds also provide tax advantages and a greater control over your child's access to funds. Do be aware though of the Inheritance tax rules around gifting, if you're unsure about this, talk to your independent financial adviser.
There are a variety of tax efficient investment opportunities out there and an independent financial adviser will be able to guide you to the best one for you and your family.
The value of shares and investments can go down as well as up.
Source: (1) Money Supermarket
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