Taking out any financial product requires plenty of research and this is especially true when opening a savings account to help your child begin adulthood on a stable financial footing.
Until the end of 2011, Child Trust Funds were one of the most popular savings vehicles for parents looking to grow capital over the long term.
However, these have been phased out and Junior ISAs (“JISA”) are available as an alternative savings vehicle for children born on or after January 3rd 2011.
ISAs created especially for children work in much the same way as adult ISAs, aiming to provide you with a long-term, tax-efficient savings account for children up to the age of 18.
It is important to note that tax assumptions may change if the law changes and the value of any tax relief will depend upon your personal circumstances. As such, it may be beneficial to speak to an independent tax advisor before taking out any products.
The maximum allowance for a JISA is £3,600, which will rise in line with inflation from 2013 onwards.
While the amount you can deposit and the possible tax advantages are important points to consider, there are other factors you need to take into account when choosing a JISA.
Is your child eligible?
JISAs are available to parents whose children did not qualify for a Child Trust Fund i.e. those born before September 1st 2002 and January 2nd 2011. Your child must also reside in the UK and be under the age of 18.
Do you want a cash ISA or a stocks and shares ISA?
There are two types of JISA account – you can choose either a cash JISA or a stocks and shares JISA.
A cash JISA works in much the same way as a bank or building society savings account, with the money you pay in accruing interest.
With cash JISAs you are guaranteed to get back all of the money you have invested. On the downside, if inflation rises faster than the rate of interest offered by the provider, your capital will lose value in real terms.
A stocks and shares JISA, on the other hand, is an equities-based product.
While the financial markets have been through something of a turbulent time in the last 12 months, equities have tended to deliver decent returns over the medium-to-long term in the past.
The value of your investment is dependent on the performance of the underlying investments in financial instruments, markets and foreign exchanges and the income from it can fall as well as rise, meaning you might not get back the amount originally invested
Diversification – putting money in a fund that invests in shares from a range of companies across different markets – can spread your exposure, but it is important to remember that you may get back less than your original investment.
How much does it cost?
Different JISA providers will have different charges relating to the management of the fund and it is important you find out exactly how much you will have to pay before selecting a product.
Who has access to the investment?
Any contribution made to the account is a gift to the child and the money cannot be accessed until the child turns 18 which is when they can access the funds or roll it over into an adult ISA.
Can I switch from a cash ISA to a stocks and shares ISA?
You are free to switch from a cash JISA to a stocks and shares JISA and back again. This can be useful if you find that one or the other is delivering better returns than you are currently enjoying.
These are just some of the important points to consider when choosing a JISA. If there are areas you are unsure of, seeking independent financial advice is something you may wish to consider.
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