The Junior Isa's predecessor, the Child Trust Fund (CTF), was expensive for investors with many providers (even tracker funds) levying a on top of the usual fees for investment management. So when Junior Isa products launch you will need to examine closely any charges and how they compare to for children, for example via a cheap investment trust savings scheme.
But I've also started to wonder whether, even if you are wealthy, there is really any point in a separate savings pot for children? First, there is the small risk that your child won't spend the money wisely. As one reader commented on our website: "My problem with Junior Isas, CTFs, etc. is that there is no guarantee that 'junior' won't be an irresponsible teenager when control transfers. I know I would have mismanaged £100k at that age. At the moment we are using my wife's Isa allowance to save for university."
Second, can you really afford it? Research from Schroders, the global asset manager, reveals that 2.7 million people have withdrawn money originally set aside for educating their children, or grandchildren, and spent it on something else. Typically, over a third (35 per cent) of the value of these 'educational funds' has been withdrawn, with only one in five in a position to replace the money spent.
Reason for raiding an educational fund | |
|---|---|
| To offset the rising cost of living | 56% |
| To pay for a holiday | 19% |
| To pay for a car | 15% |
| To pay for a deposit on a property | 11% |
| To support my business | 5% |
| For other reasons | 11% |
Source: Schroders, May 2011
Third, is it wise to put your children's financial needs before your own? Women in particular have the tendency to want to do this. But most children would prefer to see you living a comfortable retirement than in penury at the cost of providing them with an education.
So before you rush to contribute to a Junior Isa, make full use of your own and that of your spouse (together they amount to a £21,360 savings allowance per year) - this may be needed to fund family emergencies or extra funds if your retirement plans are blown away by redundancy or ill health. Your Isa money can always be given to children at a later date, or even transferred into a pension to get the income tax relief.
Remember that retirement in itself is not your end investment goal. If you stop working at 65, you may need to fund 20 to 30 years of retirement. Inflation and the investment climate over this period could be devastating for your plans. And then at the end of life, you may have to fund a stay in a care home - another hefty bill. Don't underestimate the funds that you will need.
Along the way, if you have an investment that gives you an unexpected bonus, or a windfall from inheritance, this could provide an opportunity to give funds to your children.
Giving money to children makes most sense for grandparents as part of their inheritance tax planning in later life. However, you may not need to use the Junior Isa as you can give money directly as and when it is needed, using the small gifts allowance of £250 and the annual allowance of £3,000. Plus you can give gifts out of surplus income.
Faced with all of these issues, I'm not convinced that the Junior Isa ought to see widespread take up. But for a minority of relatively wealthy families, it may have a place.
