In the past many parents have used their own individual savings account (Isa) to build up a nest egg for their children. But thanks to the introduction of the Junior Isa, adults do not have to eat into their own tax-free allowance. Junior Isas, introduced in November last year, enjoy the same tax-free benefits as standard Isas and have an annual subscription limit of £3,600.
With university fees increasing and youth unemployment on the rise, it is no secret that parents are worried about their children's financial future. A recent study conducted by JP Morgan Asset Management revealed that parents' biggest concern for their child's future is that they are able to enjoy life without struggling financially.
"Until now, investing for a child has been a quite complex process, but the format of the Junior Isa makes investing for children simpler than ever," says Tom Stevenson, investment director at Fidelity Worldwide Investment.
Parents can choose between both cash and stocks & shares accounts. The cash Junior Isa is effectively a tax-free deposit account, while stocks & shares Junior Isas permit the same investments as adult stocks & shares Isas such as equities, investment trusts, unit trust, bonds, gilts and so on.
Junior Isas or Jisas, as they are being called, are also a welcome savings vehicle for the estimated 6.7 million children who missed out on the Child Trust fund - those born on or after 3 January 2011 and those born before September 2002 .
Figures from A J Bell's investment platform Sippdeal show that by making an annual payment of £3,600 into a Junior Isa from a child's birth date until they are aged 18, you could end up with a fund of more than £92,000 (assuming 5 per cent annual growth). This money can be withdrawn by the child and used to meet costs such as tuition fees, buying a house or car and other essential expenses. Or it could remain invested and be held in the name of the child and treated from then on as a standard Isa.
The lowdown
A key difference between a Jisa and an adult Isa is that where you can take out a new Isa with a new provider each tax year, all the money in a Jisa is kept with one provider - although you can transfer funds to another provider at any time if you wish.
If you move abroad after opening a Jisa you cannot make payments into it, although the junior Isa will remain in place and continue to earn tax-free interest. If you return to the UK you can start paying into it again.
The annual limit of £3,600 can be invested into the cash and stock & shares elements in any proportion provided the overall contribution does not exceed the £3,600 limit. This limit will increase in line with inflation from 6 April 2013.
If you have set up two separate accounts for your child, for example, one cash junior Isa and one stock & shares junior Isa, they do not necessarily have to be held with the same provider.
One of the main drawbacks of Jisas is access. Withdrawals are not permitted until the child is 18, and then these can only be made by the child. While this can enforce a savings discipline and allow adequate time for the underlying investments to grow, parents will have no control over the way in which the child uses these savings.
The study by JPMorgan Asset Management also found that among those parents who would consider opening a Jisa over a third of parents (34 per cent) would sacrifice their own Isa contributions in order to do so. This isn't a good idea. If you fail to make provision for your retirement then you might be sacrificing your financial comfort for your children's. If you haven't fully used your annual £10,680 Isa allowance then you should use this first as you can always dip into it for your child at a later date. The other advantage is that you won't lose complete control of it when your child reaches 18.
Any adult with legal parental responsibility can open and manage a Jisa for a child, so it's worth having a discussion with grandparents about contributing. Contributions over and above the £3,000 annual gift allowance will not be exempt from inheritance tax (IHT). But grandparents will be able to give their annual £3,000 IHT-exempt gift allowance to their grandchild for their Jisa and that is then treated as tax-free - making it a double benefit from an overall tax relief point of view.
Jisa offerings
The choice of whether to go for a Junior cash Isa or a stocks & shares Junior Isa really depends on your attitude to risk, but if your child is still young the latter makes sense.
According to David Black, banking specialist at independent financial research company Defaqto, there are currently 32 Junior Cash Isas available from 28 providers. The average rate paid is 2.86 per cent. "It is disappointing that these aren't more widely available as increased competition is always beneficial to consumers. It is possible that the number of Junior Isa providers might have been higher if they had been introduced at the start of a tax year rather than mid-way through one," says Mr Black.
Halifax's Junior Cash Isa 'relationship' rate of 6 per cent is the the highest available rate (the next highest is Northern Bank's Junior Cash Isa at 4 per cent), but this rate is only available if the person with parental responsibility for the child also has their own Isa with the Halifax. If not, the Halifax rate is 3 per cent.
There are currently 31 stocks & shares Junior Isas available from 22 providers. Attractive offers include A J Bell's new Junior Isa on the Sippdeal platform, providing savers with the same range of investments, benefits and charges as Sippdeal's existing Isa. There are no set-up or annual administration charges; no charges for contributions or transfers in. Online dealing costs £9.95, although discounts are available for frequent dealers and regular investors. There is also an annual cash bonus of up to 0.5 per cent on fund investments.
Hargreaves Lansdown Junior Isa incurs no initial or annual charges on fund purchases, although for some passive and index funds such as Vanguard's offering there is a platform fee of either £1 or £2. For shares, the dealing charge is £5.95 with the account charge 0.5 per cent capped at £45 a year.
Fidelity's Junior Isa works in the same way as its adult stocks & shares Isa. Investors can choose from over 1,200 funds from more than 70 fund providers. There is a 1 per cent initial charge on all funds when you make your first investment, although the Junior Isa will be eligible for no initial charge on all Fidelity funds and Select List funds until 5 April.
Alliance Trust Saving's Junior Isa benefits from the company's 100 per cent fund commission rebate structure, which could add up to £8,500 to the value of the Isa over an 18-year period.
For more on Isas go to http://bit.ly/IsaGuide
