This hasn't been a good autumn for families, what with the child-benefit cuts, soaring university fees and the demise of Child Trust Fund (CTF) payments.
But now, it seems, there is a little good news with the announcement that parents will, from next year, be able to save into a Junior Individual Savings Account (ISA).
"It is great news that there's going to be a specific savings vehicle for children, but the devil will be in the detail," says Andrew Hagger from Moneynet.
Since the Government began phasing out CTF vouchers in August (these were worth up to £1,000 for lower-income families), and announced that the scheme will be axed from January 2011, many parents have been hoping for a new way to save for their children. Friends and family can continue to contribute up to a maximum of £1,200 a year into existing CTFs, but this introduction means that those who missed the boat have an alternative.
The Junior ISAs will be available from autumn 2011, and eligibility will be back-dated so that children born after the end of CTFs don't miss out. It also means that children born before September 2002, who were not eligible for a CTF, will now be able to open a Junior ISA instead. As with CTFs, any returns are tax-free and parents can choose whether to invest their money into cash, or stocks and shares. The crucial difference between the two vehicles, however, is that the Government will not be paying in any money, which has cast some doubts as to their potential success.
"The government-funded CTF voucher really provided the nudge for all parents but particularly those from lower-income families, to start saving for their children. Without a government voucher, it is crucial for the Junior ISA to be as clear, simple and accessible as possible to encourage parents to use it," says John Reeve, the chief executive of Family Investments.
Without government vouchers helping to kickstart the savings habit, these ISAs will need the backing of a much bigger tax incentive to really catch on, some experts argue.
The details of how much parents will be able to contribute each year have yet to be ironed out, but there are concerns that if that figure is too low, some families may simply decide not to bother and will concentrate on their own ISAs instead. The annual ISA limit is increasing next year to £10,680, after taking into account the new index-linking, and up to half of this new allowance can be saved in a cash ISA, with the rest available to invest in the stock market. If the Junior ISA limit can't compete with these allowances, parents could decide that they are a waste of time.
"The Government is working closely with stakeholders to ensure that new accounts will have features that families value, including what the new annual contribution limit for new accounts should be," says Kathryn Hopkins, a spokeswoman for the Treasury. "However, we are clear that the annual contribution limit for new accounts will not be set below £1,200 – the annual limits for CTFs."
Another key factor for the success of Junior ISAs will be how the high-street banks react. One of the big problems with CTFs is that providers have to accept low investments – some parents only invest the government vouchers and little else – which is why many of the big banking names have steered clear of the scheme.
If early reactions are anything to go by, the big banks seem much more open to the idea of Junior ISAs, with both HSBC and Lloyds publicly backing the move. If they and others do get on board, there is a good chance that these ISAs will benefit from much wider marketing. All of the high-street banks and building societies already offer ISAs to adults, and as long as the transition from CTFs is relatively simple, with low administrative costs, we could potentially see an impressive level of take-up – but only if the incentives are there.
"Providers will want higher minimum investments. If parents only have to invest £1 many banks won't be interested. There's got to be enough money going into these accounts to warrant taking them up," says Danny Cox, from independent financial adviser Hargreaves Lansdown.
Where the potential does lie, is in the name. ISAs are a familiar and popular savings vehicle; we all know and understand how they work so the name itself could be enough to attract parents and make this vehicle seem more straightforward than CTFs. However, the true test of their success will be when we get an idea of the interest rates that will be on offer. Many of the building societies and banks currently offer deposit savings accounts designed for young people, but many of these are less than appealing. Cheltenham & Gloucester, for example, pays a pitiful 0.05 per cent on its Young Investor account, and, if the new Junior ISAs follow suit, parents may simply decide not to bother, particularly when the spending cuts really begin to take their toll. If people simply don't have enough money to put aside and interest rates are poor, Junior ISAs could be ignored.
However, Junior ISAs will not offer parents any tax breaks they can't already access. And, with a year to go until they hit the shelves, parents wanting to save now have several other options open to them.
Children have their own personal income-tax and capital-gains-tax allowances, and can hold savings accounts with tax-free returns by filling in the HMRC R85 form and sending it to the relevant bank. If parents save for their children, any interest earned over £100 a year is taxed as if it were their own – but this limit only applies to parents so grandparents and friends are not liable.
Among the best buys for children's savings are a few attractive deals, such as the instant-access Future Builder account from Bath BS, paying 5 per cent, or Northern Rock's Little Rock, paying 3 per cent. As long as returns do not exceed each child's personal allowance (£6,475 for this tax year) interest is paid tax-free. Parents can also invest their money into Children's Bonus Bonds from National Savings and Investments (NS&I); these are also exempt from tax for parents and children. NS&I also offers Premium Bonds which can be bought for children under the age of 16 by parents, guardians and grandparents.
Danny Cox, Hargreaves Lansdown
"The Junior ISA does have the potential to piggy-back off the mainstream success of adult Individual Savings Accounts, and could work much better than CTFs. We all know what ISAs are and they've been a huge success story, so the name is a clever approach."Reuse content