ISAs – or Individual Savings Accounts – have been available in the UK since 1999. But the brand new Junior ISAs will now give you a chance to start saving for your kids.
From 1 November last year, the new tax efficient Junior ISA accounts will be launched in the UK, to allow adults to save and/or invest money on behalf of children.
Junior ISAs replace Child Trust Funds. Child Trust Funds were no longer available from January last year, with no further contributions being received into existing plans from the government after that date.
Who can have a Junior ISA?
You can open a Junior ISA account for your child as long as they did not qualify for the previous Child Trust Fund.
So if your child was born before 1st Sept 2002 or after 3rd January 2011 they are eligible.
How do they work?
The main features of the Junior ISA are as follows:
- Available from 1 November 2011
- Maximum annual contributions of £3,600 (payable in lump sums or monthly)
- No government payment to boost the scheme
- Like the adult version, you can invest in a Stocks and Shares ISA, or Cash ISA, or both
- Tax efficient investment
- The account is held in the child’s name
- At age 18, the account flips into an adult ISA, and funds are then accessible
What’s good about Junior ISAs?
The advantages of a Junior ISA over traditional savings / investment accounts for children are:
- Proceeds are paid out completely free of tax
- Contributions are completely flexible, you can pay in as much or as little as you wish, as long as you are not exceeding the £3,600 annual allowance. Similarly, payment levels can be increased or decreased, without penalty
- The funds are locked up until age 18 – removing temptation to access the funds.
What’s bad about Junior ISAs?
A possible downside is that fact that your child has complete control over the account and can spend the money as they wish from age 18. You may need to consider this.
Are there any risks?
There are two sorts of ISA:
- Cash ISA – These are like a normal savings account, but the interest is tax-free. You can choose a ‘cash ISA’ if you’re a very low risk investor. This means that your child will get rates similar to a savings deposit account, (but the interest will be free of tax).
- Stocks & Shares or Investment ISA – You should aim to keep this investment for the medium to long term (at least five years), as investment performance can fluctuate. If you choose a ‘Stocks & Shares ISA’ you should be prepared to take on a degree of risk in return for the potential of better performance. Or you can do a combination of the two.
Start saving early
If you were to invest the maximum £250 per month into a Stocks & Shares Junior ISA for 18 years – at a growth rate of 7% – your child would receive a fund at age 18 of £108,000.
Bearing in mind experts predict that a total pot of £60,000 will be required to put your child through university, and the difficulties facing school leavers and graduates when getting on the property ladder – this could be handy!
