Junior ISAs explained

November 1 sees the launch of Junior individual savings accounts (ISAs) which will enable parents, grandparents, relatives and friends to build up a tax-free lump sum for their children.

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Some 6 million children will be eligible at the outset, with 800,000 more newborns becoming eligible each year.

However, only about 1.2 million families are expected to take advantage of the new savings schemes, which are designed for children who missed out on Child Trust Funds (CTF) launched by the previous government.

Research from Family Investments indicates that 511,000 of the 700,000 children born so far this year are unlikely to have accounts opened on their behalf – largely because their parents do not know about Junior ISAs.

Family Investments’ figures indicate that that the tax-efficient Junior ISA – open to all those without CTFs as well as those born after January 2, 2011 – will become popular with parents and grandparents who can afford to put some money aside for the young people in their lives.

Danny Cox at adviser Hargreaves Lansdown said: “We expect Junior ISA to become the children’s savings scheme of choice.”

What are the Junior ISA options?

Parents must decide whether to choose a Cash account, a Stocks and Shares version with access to investments including funds, investment trusts, gilts and bonds – or a combination of the two.

Tax advantages of the accounts will include no income tax on savings and no capital gains tax or tax on dividend income for those who choose the investment version.

And while parents can choose for their child to take control of the account at 16, most Junior ISAs are expected to be converted into adult ISAs once the recipient reaches 18 year of age – at which point he or she can choose to cash it in, or continue saving.

Either way, the maximum that can be paid into the accounts this year is £3,600, but this will rise in line with the Consumer Prices Index from April 2013.

Contributions can be split between Cash Junior ISA and Stocks and Shares Junior ISA, while parents disappointed by poor investment performance or low interest rates can also choose to switch providers.

Only one Cash and one Stocks and Shares Junior ISA can be held per child at any one time, though.

And there is no contribution from the government as there was with CTFs.

Which type should I choose for my child?

Despite recent market volatility, AIC research indicates that there will be a much stronger demand from parents for stocks and shares Junior ISAs than was the case with CTFs.

Its figures show that 43% of parents who are planning to open Junior ISAs for their children intend to invest in stocks and shares through the account, compared to just 8% of parents with CTF vouchers to invest in 2005. And it is keen to encourage this trend.

Annabel Brodie-Smith at the AIC said: “Over 18 years, a £1,000 investment in the average high interest rate savings account has grown to just £1,690 compared to £3,400 for the average investment company – more than triple the initial investment.”

JP Morgan Asset Management, which will be offering a Junior ISA in the first quarter of 2012, is also urging families to look at investing the money, rather than putting it into a Cash ISA, to make the most of the funding available.

David Barron, Head of Investment Trusts at J.P. Morgan Asset Management, said, “Our calculations show that 18 years of investing the average contribution pot of £1,117 every year, assuming a 5% return per annum, would mean a savings pot worth over £34,000 by the time the child turns 18.

“Meanwhile, saving the total Junior ISA amount of £3,600 per annum – or £300 a month – could result in a sum of more than £100,000.”

There are, however, concerns that many of the investment-based Junior ISA accounts will require minimum premiums of £50 a month – putting them out of reach for many cash-strapped parents.

This is not true of all the Stocks and Shares options, though. Family Investments is offering a Junior ISA with access to stock market-based investments and a minimum premium of just £10 a month.

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What about Cash Junior ISAs?

Poor interest rates and high inflation have made cash accounts less attractive – especially for those saving for the longer term.

Kevin Mountford, head of banking at MoneySupermarket said: "The Junior ISA will be a vital tool for tax efficient savers and is great news for parents and grandparents of the six million children eligible for a Junior ISA this year, and for the further 800,000 children eligible next year. However, autumn is an unusual time of year to launch Junior ISAs as providers traditionally focus on peak ISA season each spring to launch new products, so it may be some time until we see any real competition in this market.

"There has never been a more important time for parents to start planning for their child's future. With the increased cost of living and rise in university tuition fees, the earlier parents put their savings plan into action, the better start they can give to their children.

However, the AIC’s findings also suggest that 46% of parents who are likely to invest in a Junior ISA intend to stick solely with cash.

If you, like them and prefer to take no risk with the money you are putting aside for your child – or want to split the cash between Cash and Stocks and Shares accounts – then the good news is that Cash Junior ISAs are expected to be available from most banks and building societies.

Nationwide Building Society, for example, is launching a Smart Junior ISA paying 3.00% (variable), including a fixed 0.90% bonus lasting until October 2013.

What is happening to CTFs?

The amount that parents and other relatives can pay into CTFs will rise – in line with the Junior ISA contribution limit – to £3,600 from November 1.

However, CTFs are now closed to new savers and children with CTFs are not eligible for Junior ISAs, meaning that no transfers can be made between CTF and Junior ISA providers.

Consequently, CTF performance is often disappointing with Nationwide's cash CTF, for example, paying a standard rate of just 1.1% (or 2.1% if you meet certain conditions).

Which? executive director Richard Lloyd said: "Unless the government allows transfers from CTFs to Junior Isas, a whole generation of young savers could be stranded on uncompetitive rates."

Junior ISAs available on day of launch

The table below shows the Junior ISAs available from 1st November 2011.

Provider

Deposit

AER

Nationwide Building Society - Junior ISA

£1

3.00%

Buckinghamshire Building Society - Junior ISA

£10

3.00%

Skipton Building Society - Junior ISA

£1

3.00%

Bank of Cyprus - Junior ISA

£25

2.75%

Furness Building Society - Junior ISA

£1

2.50%

Ipswich Building Society - Junior ISA

£10

2.40%

Harpenden Building Society - Junior ISA

£1

2.25%

Mansfield Building Society - Junior ISA

£1

2.00%

National Counties Building Society - Junior ISA

£1+
£1,000+
£3,000+

1.81%
2.26%
3.01%

Bank of Cyprus - Fixed Rate Junior ISA (12 months)

£25

2.90%

Source: www.moneysupermarket.com 31st October 2011

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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