Launched with a whimper rather than a bang last November, are junior ISAs finally starting to come of age?
Recent moves by Halifax have certainly injected some much-needed life into a market that has been largely ignored by the big High Street names. Halifax has launched a junior ISA paying a headline rate of 6 per cent – far more than the best buys in both the junior ISA and standard ISA markets. But there are substantial strings attached.
The minimum you must deposit each month is fairly low at £10. The major sticking point, however, is that if you want to get the top rate of 6 per cent, you (the parent) must also hold an ISA with Halifax, otherwise the rate falls to 3 per cent. Halifax says that parents who deposit the full £3,600 from birth to age 18 would amass a savings pot for their child of £117,936 at maturity, which is £31,115 more than if they were earning only 3 per cent.
Richard Fearon, the head of Halifax savings, says: "It's important for children adopt a positive savings habit at an early age, and learning from their parents is the best way to achieve that."
If you are already a Halifax ISA customer, the extra interest will be applied automatically. If you are not, the choices are fairly uninspiring. The Halifax instant-access ISA Saver Online pays 2.6 per cent (which includes a 2.35 per cent bonus for the first 12 months) which can be beaten by many other providers including the newly launched ISA from Nationwide Building Society paying 3.1 per cent.
Andrew Hagger from Moneynet says: "If you compare the Halifax ISA Saver Online which pays 2.6 per cent against the current market leader from Nationwide BS and invest £5,340 for 12 months, you'll be £26.70 worse off with the Halifax."
However, you need to factor in the combined result of holding both an adult and junior ISA. Somebody with the Nationwide best buy would be able to earn only 3 per cent on the junior account.
"If you open the Halifax junior ISA at 6 per cent and fund it with at least £900, the net effect is that you'll recoup the £27 you're losing on the adult ISA deal," Mr Hagger says.
So if you're using the full adult ISA allowance in an easy access account then at the moment the Halifax 6 per cent deal becomes a smart strategy if you're investing £900 or more. Halifax also offers some competitive fixed-rate deals, including a five-year account paying 4.2 per cent and a four-year fix paying 4.1 per cent, so combining either of these with the JISA would give a good overall return.
Even with signs of some competition in the JISA market, there are currently only 27 providers offering the savings product. David Black, a banking analyst at Defaqto, says: "It is disappointing that they aren't more widely available as increased competition is always beneficial to consumers. It's possible that the number of JISA products available might have been higher if they had been introduced at the start of a tax year rather than mid-way through one."
With a JISA, parents, grandparents, friends, relatives and children themselves are allowed to save up to £3,600 a year without worrying about the tax man. As with adult ISAs, the money can be split across cash, stocks and shares, but otherwise the rules are more constrictive. First, no withdrawals are permitted until the child reaches 18, and only one account of each type is allowed at a time. If the account holder does want to switch, they must transfer all of their JISA money to the new provider. There is one area of extra flexibility though – with a JISA you can switch from cash to equities and back to cash again, which is not permitted with an adult ISA. An extra bonus is that at age 16 and 17 the child may hold both a JISA and an adult cash ISA, benefiting from the full allowance on both.
Equities are certainly worth considering as a long-term investment. The stock market has its risks and you must understand these before diving in, but over such a long period of time equities usually beat cash. There are currently 32 stocks and shares JISAs available, from 22 providers.
Whichever vehicle you choose for your child, it is worth remembering that they will have sole access at age 18, so no matter how much you might want them to spend it on their education or a downpayment on a property, the decision ultimately is theirs.
Remember that the rules governing the transfer of junior ISAs are more complex than those for standard ISA accounts. This makes it all the more important to choose the right JISA and provider. It is only possible to hold one junior ISA of each type – cash and equity. If a transfer is being made between providers managing the same type of JISA it must be transferred in its entirety. If a transfer is being made to a different type of JISA, say from cash to equities, a partial transfer can be made.
Expert View
Andrew Hagger, Moneynet
The Halifax JISA rate of 6 per cent is excellent and double what any other providers are currently offering – most other building societies are offering around 3 per cent. The catch with the deal is that the 6 per cent rate is only available if the parent has an adult ISA with Halifax, so it's a different and innovative approach, but may not be the best option for everyone.
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