Will Junior ISAs allow kids to get a decent financial start in life?
the treasury released full details on Wednesday of the new children's tax-free savings accounts which will be launched in the Autumn. Junior ISAs will allow children to save up to £3,600 each year and pay no tax on the interest or growth. Kids will be able to get at the money when they reach 18.
They are the Coalition government's replacement for Labour's Child Trust Fund scheme. Under that scheme, children got a savings kick-start from the government: £250 when they were born, £250 when they reached the age of seven. But David Cameron obviously felt that children shouldn't have the benefit of state help, as Child Trust Funds were scrapped almost immediately after the Coalition came to power.
The replacement – Junior ISAs – will not benefit from any government contributions. It will be up to family and friends to put cash into the accounts for when a child reaches 18. Without the government money, will many people bother to open a Junior ISA?
The savings schemes will be available from 1 November to any UK child under 18 born on, or after 3 January 2011, or born before September 2002, when eligibility for Child Trust Funds started. The latter will have their investment limits increased from £1,200 to £3,600 per year, in line with the new Junior ISAs.
Anyone who can afford to salt away the maximum amount into a Junior ISA each year will build a massive nest egg for their child. Fidelity calculates that if the full allowance was invested every year from birth until the age of 18, the total ISA would be worth £101,336. That assumes a growth rate of 5 per cent and is adjusted for an inflation rate of 2.5 per cent.
"With the increased focus on the individual to provide for themselves, rather than rely on the state or employer, the Junior ISA has the ability to teach an important lesson to young people early in their life," says Fidelity's Rob Fisher. "The earlier they start saving, the earlier they can benefit from the compounding of their assets and the long-term performance of the stock market. It will also help focus adults to save and invest on behalf of their children for university and first-home deposits, in addition to encouraging the discipline of saving."
Who will offer Junior ISAs? Most major savings institutions and investment houses are likely to offer the opportunity to build up tax-free cash in investments or deposit accounts for kids. "Junior ISAs will come in two forms," says Kate Moore of Family Investments. "First, high street banks and building societies will look to offer mass-market cash accounts starting at £1. At the other end of the spectrum, fund managers will look to capitalise on the new tax allowance with investment accounts aimed at wealthy individuals."
Some may simply administer the accounts, others may go further and offer an element of financial education. "Ideally Junior ISAs should be linked to financial education in the classroom, and this is particularly appropriate given that children will be able to manage their accounts from age 16," says Ian Sayers of the Association of Investment Companies.
"Financial education would help foster a savings culture and teach children that regular saving, even with more modest sums, can make a real difference over the longer term."
From a parents' point of view, a Junior ISA could be an ideal way to build up a sum to pay for future university fees. To accumulate the £27,000 needed to meet the new £9,000-a-year university tuition fees for three years, for instance, would mean saving £82 a month from birth to cover the cost.
Choosing whether to put the cash into a savings account or investments held within a Junior ISA is a crucial decision. Over the long-term, the best returns are likely to come from investment that can benefit from stock market growth. But, as investors have discovered in the last decade or so, stock market fortunes can fluctuate widely.
A more basic deposit-type account may prove less worrisome, but returns are potentially going to be smaller. If you decide to go for a simple savings account, then your duty to a child doesn't end with opening it. You'll also have to monitor it closely to ensure that a youngster is getting the best returns he or she can.
"Generally, children's savings rates are low across the market so anyone saving into a Junior ISA should be prepared to shop around for the best deal and ensure they switch regularly in order to maximise returns," says Kevin Mountford of Moneysupermarket.
While any family members or friends will be able to contribute to a Junior ISA – up to the annual limit – some may be put off by the fact that, at 18, a child will be able to access the cash. What options are there for people who want to build up a nest egg for a child but want to retain control over when and how the child receives their windfall?
"One option is to set up a unit trust or investment trust under what is known as a bare trust," explains Kate Moore. "Under a bare trust, the investment is held in the adult's name and controlled by them, but the proceeds are beneficially owned by the child."
That has tax advantages as well as giving parents or grandparents control over how and when the money is handed over. An independent financial adviser will be able to explain more about bare trusts and whether they are right for your situation.
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