Parents will be able to save up to £3,600 a year for their children via the Junior Isa, a new tax-free individual savings account for the under-18s, set to launch on 1 November. The government has now issued final regulations for these accounts, first announced in last year's Emergency Budget.
The lowdown
Junior Isas will be available to all children who missed out on the Child Trust fund - those born on or after 3 January 2011 and those born before September 2002. It is estimated that 6.7m children will be eligible.
As there are with the adult Isa versions, there will be both cash and stocks & shares accounts. The cash Junior Isa will effectively be a deposit account, while the stocks & shares Junior Isa will permit the same investments eligible for adult stocks & shares Isas such as equities, investment trusts, unit trust, bonds, gilts and so on.
A key difference between a Junior Isa 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 Junior Isa is kept with one provider - although you can transfer funds to another provider at any time if you wish.
A number of companies, including Fidelity International, Fundsmith and Witan Investment Trust have announced plans to have a Junior Isa offering in place come 1 November. A number of members of the Association of Financial Mutuals are also expected to offer these vehicles with a minimum montly premium of £10.
Junior Isas will have an annual limit of £3,600 for each tax year, which 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.
Fidelity calculates that if the full Junior Isa allowance is invested every year from birth until the age of 18 with an assumed growth rate of 5 per cent and the allowance was adjusted for an inflation rate of 2.5 per cent, the total Isa would end up being worth more than £100,000 - a substantial nest egg and a useful way to save for a child's tertiary education.
Opening an account
Anyone with parental responsibility can open a Junior Isa and until the child is 16 the account will be managed by the person opening the account. At age 16 the child has the option of taking over the management of the Isa and will then have full control over where and how the money is invested. However, the child could also choose to let the account continue to be run by the registered contact.
One of the main disadvantages of Junior Isas is that withdrawals are not permitted until the child is 18, and then only by the child. While this can enforce a savings discipline and allow adequate time for the underlying investments to grow, parents or donors will have no control over the way in which the child uses these savings once he or she reaches 18.
At age of 18, the Junior Isa will roll into an adult Isa. Investments will not have to be sold, but can be transferred across in specie.
Who can invest?
Grandparents and other family friends and relations can contribute to a child's Junior Isa. As this is perceived to be a low-risk product, unlike other children's savings accounts each donor will not be subject to the full money laundering regulations. This is seen as one of the key benefits of the Junior Isa.
A drawback, however, is that unlike Child Trust Funds (CTFs) there is no contribution from the government into the account.
