The Junior ISA will be launched on November 1, 2011 and the government estimates that 6m children will become eligible to contribute, with a further 800,000 a year after that.
As you’re probably aware, the child trust fund (CTF) was closed to children born after January 2, 2011. The Junior ISA is a replacement for the CTF.
Let’s look at some of the ‘key features’ of the Junior ISA, as well as some of the pros and cons.
- Only UK resident children who do not have a CTF will be eligible (born prior to September 2002 and after 2 January 2011)
- A Junior ISA can be opened by anyone with ‘parental responsibility
- Any person or organisation will be able to contribute to any child’s Junior ISA
- A child aged over 16 can open a Junior ISA themselves
- This will be in addition to the adult cash ISA that they are permitted to open at age 16 (with a limit of £5,340)
- £3,600 can be contributed every year, which will be increased in line with the consumer prices index measure of inflation each year from 5 April 2013
- It will be possible to hold one cash pot and one stocks and shares account, therefore holding the money with a maximum of 2 providers (unlike an adult ISA where you can take out a new ISA with a different provider each year) subject to the maximum annual allowance of £3,600 combined
- It will be possible to transfer between providers
- The contribution limit applies to both types of account combined
- All income and capital gains will be tax free
- Once the child reaches 18, the Junior ISA will revert to being a normal adult ISA
- The parental settlement income tax anti-avoidance rule will not apply. This means that if income in a tax year derived from the subscriptions of a parent exceeds £100 gross, it will not be assessed to tax on that parent even though the child is a minor who is unmarried and not in a civil partnership
- no transfer from a CTF will be possible
- those with a CTF will not qualify for a Junior ISA
- the Junior ISA will be unsuitable for funding towards school fees as the money cannot be accessed until 18
- there will be no voucher from the state as was the case with the CTF
- the child will be able to access all the accrued funds at age 18 as control of the money passes to them
It’s also worth pointing out that if you do hold a CTF, the annual allowance will be increased from £1,200 to £3,600 from 1 November, 2011 to match the Junior ISA (as well as being index-linked from 2013).
It has been predicted that if a junior ISA were commenced at birth and the full investment permitted were made each year then at an assumed rate of growth of 5% and the maximum contribution adjusted upwards by 5% pa a fund of around £100,000 could result at age 18.
With the burgeoning costs of higher education all of this is likely to be needed to fund a full time degree course (assuming of course that the child wants to spend the money in this manner!).
The Financial Tips Bottom Line
Junior ISAs will be a credible and valuable option for parents who want to save and invest towards their childrens’ futures.
At the same time, there are a number of other options available, which we covered not too long ago.
When the Junior ISA launches, make sure you take the time to do the research necessary. If you’ll be opting for the stocks and shares option, you will have a wide choice of funds to choose from.
You should think carefully about how much risk you want to take, although you will be able to alter this during the life of the account.