By Kay Carson
Junior ISAs and child savings accounts
Thinking of starting a nest egg for your child? Just like an adult ISA, or Individual Savings Account, a Junior ISA is a way to save or invest money without paying tax on the interest earned.
Junior ISAs – or JISAs, as they are becoming known – were launched in November 2011 to replace the now defunct Child Trust Fund (CTF).
Children aged below 18 who didn’t qualify for a CTF (i.e. those born before September 2002 or after January 3, 2011) are eligible to open an account, so if your child already has a CTF he or she will not be able to open a JISA.
Unlike CTFs, the Government doesn’t make any top-up contributions to JISAs, but in addition to parents’ or guardians’ deposits, grandparents, godparents, relatives and friends can also pay funds in to the account.
From the age of 16 onwards, the child can manage their own JISA, but all savings deposited are still locked away and cannot be accessed until the child reaches the age of 18, when the funds can be withdrawn or converted to an adult ISA.
As with the adult version, the JISA has an upper limit each tax year determining how much can be saved or invested tax free, but the limit is lower – £3,600 compared with the adult £5,340 for cash and £10,680 for investment ISAs.
But there is currently a tax free loophole, because 16 year olds can also open an adult ISA, which means that kids aged 16 to 18 can potentially have a bigger tax free allowance than anyone else.
Again, it’s a case of ‘use it or lose it’ – if savers don’t use up the annual tax free allowance before the end of the tax year on April 5, then it is lost forever and cannot be carried over.
There are two types of Junior ISA – cash JISAs and investment (or stocks and shares) JISAs. A child can only hold one cash and one investment JISA at a time.
Cash JISAs tend to have fairly low rates of interest, but offer a safe, tax-free place to grow your savings. Both fixed rate and variable rate accounts are available, with options for parents to pay in a lump sum or make regular deposits. However, deposits don’t have to be paid in every year.
Depending on the account provider’s terms and conditions, cash JISA savers might also be able to switch to a different provider offering a higher rate of interest, or move some of their child’s funds to an investment JISA.
But bear in mind that savers can’t just withdraw the cash and close the account if they want to switch to another provider, or they will lose their tax free allowance for that year. Instead, they should arrange a transfer through the current JISA provider.
On the other hand, stocks and shares JISAs can generate bigger returns but may be riskier depending on the investments made. However, parents are likely to have up to 18 years, so may be able to afford to invest in riskier, potentially higher yielding stocks. There is generally a wide range of investment options to choose from.
Savers will pay no capital gains or income tax on any profit made through a stocks and shares JISA, but it’s worth checking with the provider how much will be charged in management fees for this type of account.
Pros and cons of Junior ISAs
The main savings goals parents currently have for their children are to provide money for their education, to assist with a deposit for a house, or more generally to give them a good start to their adult life. Maintaining a junior savings account can also help to teach your child about financial responsibilities.
However, there is still a limited range of JISAs to choose from – just 27 junior products compared with around 190 for adults and, together with the fairly low rates offered, this has discouraged parents who have other financial priorities.
Besides, children do not pay tax anyway, unless they are earning more than £143 a week which is unlikely for most, so the attraction of a ‘tax free’ savings account may be groundless.
Long term JISA
If you are looking for a long term investment JISA, the Aberdeen Emerging Markets Fund is worth considering. The minimum investment is £500 in a lump sum, or £50 a month. The term ‘emerging markets’ refers to newly industrialised or Third World countries which are in the process of transitioning to an open market economy.
Shorter term JISA
For those seeking a shorter term stocks and shares JISA, the Threadneedle UK Equity Income Fund may be worth a look. It currently offers a five year total return of around 19.2 per cent.
Best buy cash JISAs
Here is a selection of Junior cash ISAs paying around three per cent interest on savings.
Account Name: National Counties Building Society Cash Junior ISA
Interest Rate: Up to 3.01% AER (variable)
Comments: A statement is issued to savers every October and interest is paid October 1 each year. The account pays tax free variable interest rate which increases as the balances rises. Start savings from £1 upwards by phone, in branch or by post. Transfers to another Junior ISA account are allowed after 45 days’ notice.
Account Name: Halifax Junior ISA
Interest Rate: 3% AER
Comments: If the parent opens an ‘adult’ ISA alongside this product, the tax free interest paid into the JISA will double to 6%. If the parent closes his or her ISA, the interest will revert to 3% for the junior account.
Account Name: Lloyds TSB Junior ISA
Interest Rate: 3% AER
Comments: No short term bonus. The minimum deposit is £1 and account can be opened in branch.
Account Name: Skipton Building Society Junior ISA
Interest Rate: 3.02% AER
Comments: Minimum opening deposit required is £1. Payments into the account can be by cash, cheque, debit card or transfer.
Account Name: Nationwide Junior ISA
Interest Rate: 3.25% AER variable
Comments: Savers get 3.25% interest on all balances from £1. The rate includes a fixed bonus of 0.9% until January 31, 2014. Only for children aged below 16. Open the account online, in branches or by phone with £1 upwards.
Free ISA guide: Click here
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