Junior ISAs: a bit of good news for families

A new Individual Savings Account may be just the thing for parents seeking an alternative to the soon-to-expire Child Trust Fund

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.

Expert View

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."

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Suggested Topics
News
Jacqueline Bisset has claimed that young women today are obsessed with being 'hot', rather than 'charming', 'romantic' or 'beautiful'
people
Arts and Entertainment
Lena Dunham
booksLena Dunham's memoirs - written at the age of 28 - are honest to the point of making you squirm
Arts and Entertainment
A bit rich: Maggie Smith in Downton Abbey
tvDownton Abbey review: It's six months since we last caught up with the Crawley clan
Sport
Frank Lampard and his non-celebration
premier leagueManchester City vs Chelsea match report from the Etihad Stadium
PROMOTED VIDEO
News
people
Life and Style
A new app has been launched that enables people to have a cuddle from a stranger
techNew app offers 'PG alternative' to dating services like Tinder
Sport
Greg Dyke insists he will not resign as Football Association chairman after receiving a watch worth more than £16,000 but has called for an end to the culture of gifts being given to football officials
football
Arts and Entertainment
Jake Quickenden sings his heart out in his second audition
tvX Factor: How did the Jakes - and Charlie Martinez - fare?
Sport
premier league
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave crime series
Sport
Mario Balotelli celebrates his first Liverpool goal
premier leagueLiverpool striker expressed his opinion about the 5-3 thriller with Leicester - then this happened
News
Britain's shadow chancellor Ed Balls (L) challenges reporter Rob Merrick for the ball during the Labour Party versus the media soccer match,
peopleReporter left bleeding after tackle from shadow Chancellor in annual political football match
Arts and Entertainment
Female fans want more explicit male sex in Game of Thrones, George R R Martin says
tvSpoiler warning: Star of George RR Martin's hit series says viewers have 'not seen the last' of him/her
News
i100
News
i100
Sport
Plenty to ponder: Amir Khan has had repeated problems with US immigration because of his Muslim faith and now American television may shun him
boxing
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior BA - Motor and Home Insurance

    £400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

    Market Risk & Control Manager

    Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

    SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

    £320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

    Head of Audit

    To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

    Day In a Page

    A roller-coaster tale from the 'voice of a generation'

    Not That Kind of Girl:

    A roller-coaster tale from 'voice of a generation' Lena Dunham
    London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

    London is not bedlam or a cradle of vice

    In fact it, as much as anywhere, deserves independence
    Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

    Vivienne Westwood 'didn’t want' relationship with McLaren

    Designer 'felt pressured' into going out with Sex Pistols manager
    Jourdan Dunn: Model mother

    Model mother

    Jordan Dunn became one of the best-paid models in the world
    Apple still coolest brand – despite U2 PR disaster

    Apple still the coolest brand

    Despite PR disaster of free U2 album
    Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

    Despite the result, this is the end of the status quo

    Boyd Tonkin on the fall-out from the Scottish referendum
    Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

    Manolo Blahnik: Flats, Englishness, and Mary Beard

    The shoe designer who has been dubbed 'the patron saint of the stiletto'
    The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

    Scrambled eggs and LSD

    Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
    'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

    'Normcore': Blending in is the new standing out

    Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
    Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

    New leading ladies of dance fight back

    How female vocalists are now writing their own hits
    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments