Junior savings: It's surprising how they grow

After the demise of Child Trust Funds, a new scheme can help parents to build a nest-egg for their children. By Rob Griffin

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Junior Individual Savings Accounts, the latest twist in the children's savings tale, will launch on Tuesday. But questions remain over whether these products will be the ideal vehicles in which to save for a child's future or whether parents should consider a wider range of options.

The Junior ISAs, which are tax-free savings account for children, are being launched in a bid to help plug the gap created earlier this year by the Government's decision to axe the ill-fated Child Trust Funds and save itself half a billion pounds every year.

Mark Hoban MP, the Financial Secretary to the Treasury, has said the introduction of these products, which follow the same principle as Individual Savings Accounts, will "strengthen the savings culture" by enabling parents and family friends to contribute to a child's savings.

"Junior ISAs are a great example of a simple, clear and jargon-free financial product that allows families to save and invest for their child's future," he said, adding that six million children would be able to take advantage at launch, with a further 800,000 becoming eligible each following year.

But although independent financial advisers have broadly welcomed their impending arrival, they are also quick to suggest that parents, grandparents and other relatives need to look at a range of solutions to meet the short, medium and longer-term needs of children.

Justin Modray, founder of the website Candid Money, believes the principle benefit of a JISA is to make life simpler, as well as avoiding the issue of income tax liability if the interest on gifts of money given by parents exceeds £100 per parent, per child.

"Parents won't get very excited about JISAs as unlike Child Trust Funds, the Government doesn't put any money in the pot," he says. "Nevertheless, the tax-free interest and gains could be worthwhile over the longer term."

But research also suggests that many parents are still in the dark about these new accounts. Twelve months ago, 91 per cent of parents with children under 18 hadn't heard of JISAs – and that figure has only gone down to 73 per cent, according to Family Investments.

This means that half a million of the 700,000 children born so far this year are unlikely to have an account opened on their behalf – and this means they will be missing out financially, points out Kate Moore, head of savings and investments at Family Investments.

"Based on our experience with Child Trust Funds, parents contribute an average of £27 a month to the accounts," she says. "Applying these figures to the Junior ISA, new-born children could miss out on up to £165m within the first year of the new scheme alone, and in many ways this is just the tip of the iceberg as the Junior ISA is open to any child aged under 18 who does not have a CTF."

Junior ISAs

Children living in the UK who don't have a Child Trust Fund will be eligible for one cash and one stocks and shares Junior ISA at any time. For each child there will be a total yearly limit of £3,600 for all payments into these accounts, no matter who makes them.

As is the case with Child Trust Funds, the accounts – which will be available from a variety of banks and investment houses – will belong to the child and the money cannot be withdrawn until they reach 18 years old, although they can become responsible for accounts from their 16th birthday.

They are certainly creating a stir among investment houses that see them as a potentially lucrative source of business over the next few years. With millions of children being eligible for such a product it's little wonder that they have been falling over themselves to launch such accounts.

Child Trust Funds

These are tax-free savings accounts for children who were born between 1 September 2002 and 2 January 2011. Those eligible are entitled to a voucher worth between £50 and £250 – depending on their birth date and when they became entitled to an account.

Although not available for children born since 3 January this year, anybody can put money into an existing CTF up to the annual limit of £1,200 for all contributions. The benefits are that there is no tax to pay on any interest or gains generated. The child can access the cash when they turn 18.

The tax-free benefits are enticing but this has to be weighed up against the fact that you will not be able to access the money in the case of emergencies.

Bank and building society accounts

A basic bank account might not pay huge amounts of interest but can still be a good idea because it can help get a child into the savings habit. They are particularly useful places to keep money for short-term needs and can teach a child about the virtues of budgeting.

Geoff Penrice, an independent financial adviser with Honister Partners, says there are pros and cons with them. "Bank accounts have the benefit that your funds can not go down in monetary value," he says. "However, over the long-term cash deposits tend to be eroded by inflation."

Children and adults have the same personal allowance of income that they can receive tax-free. For the tax year 2011-12 it is £7,475. As long as they are below this figure they'll be able to receive interest without having the tax deducted and claim back any tax that they shouldn't have paid.

* For parents or step-parents that give money to a child that earns more than £100 interest during the year, will be taxed as if it was their own. However, this limit doesn't apply to grandparents and other adults who give money to children so they won't be liable to pay tax in such instances.

NS&I Children's Bonus Bonds

These enable you to invest for a child's future in their own name and provide tax-free interest for children under 16, with an additional bonus if the money remains untouched for five years. These products are available in "issues", with each one having its own rate of return. You can invest between £25 and £3,000 per issue, per child. As an additional level of comfort, they are backed by the Government so the capital is secure.

So how should you choose between them? According to Geoff Penrice, an independent financial adviser with Honister Partners, it is worth having a mix of solutions with assets held in both cash and within tax-efficient investments.

"The main considerations will be how much you can afford to contribute, the timescales over which the funds will be invested and the level of investment risk you are prepared to take," he says. "The longer the funds are invested, the greater the degree of risk that you can take."

Whichever route you eventually choose to take, it's important to have the same considerations at the back of your mind when considering your options, says Richard Marriott, Nationwide's head of savings.

"You should start saving now to help ensure the biggest possible next egg for your children and invest as much as possible, without committing to more than you can afford," he says. "It's also worth thinking about saving on a monthly basis as it's surprising how this can build up over time."

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