Are you ready for Junior ISAs?

20th Oct '11 by Steven Dotsch

8 comments 6261 reads

From November 1, 2011, Junior ISAs can be opened to anyone aged less than 18 who is not already eligible to have a child trust fund. That means children born before September 1, 2002, or after January 2, 2011.

The maximum yearly contribution for a Junior ISA is £3,600, but this will be uplifted in line with the Consumer Prices Index measure of inflation from 2013/14 tax year onwards. Until then, parents, grandparents, other relatives and friends and the children themselves can contribute up to £3,600 a year.

All money saved or invested in the Junior ISA account belongs to the child and will be locked away until they reach adulthood at age 18. Money in a Junior Isa can be put on deposit or invested in stocks and shares.

Junior ISAs are tax-free savings vehicles for children and the successor to child trust funds which were scrapped in January 2011.

Taking the long view

Look at your children now and you'll foremost think of their education, marriage or career, not retirement. Now, though, with the introduction of Junior ISAs it may be a smart move to set them up with a stocks and shares ISA for their retirement.

Just imagine, you as parents and/or grandparents, bankrolling or subsidising an annual £2,000 Junior ISA contribution for just five years, starting when the child is at age 13? You are just putting your teenager in line for them to potentially receive £10,000 annual tax free retirement income from that original seed money, when they retire.

In fact: you are gifting 50 years of http://www.dividend-income-investor.com/how-teenagers-can-compound-their-way-to-a-fortune/ compound growth.

Why not get your kids to participate?

Your child doesn’t need to fork over his or her own savings to fund their own ISA. But why not offer to match their contribution to get them interested in long-term saving and investing?

To get your kids in appropriate “saving mood” consider offering them a generous matching contribution. Why not stimulate them to save via a Junior ISA when you match part of their wages from any job - babysitting, mowing lawns, waiting tables – when they invest some of it in their ISA? Say, for every pound they contribute, you pitch in £10. Or £20. That should make it fly with your teen.

Get the family involved

Once launched, Junior ISAs should be popular with grandparents, aunts and uncles. They should…

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Steven Dotsch

31st Oct '11

Has anybody come across any announcements from online stockbrokers which currently operate ISAs that they will launch a Junior ISA?

Fangorn

HL and Fidelity have already sent out information on Junior ISA's.

http://www.hl.co.uk/investment-services/junior-isa

https://www.fidelity.co.uk/investor/guidance-planning/invest-children/junior-isa-announcement.page

snaj

I understand that Foreign & Colonial, The Children's Mutual and Killik & Co will also be offering Junior ISAs of the Stocks & Shares type.

In addition to Steven's 'Final quirk' paragraph in the article, 16 and 17 year olds can also subscribe to Cash ISAs in addition to the Junior ISA - one needs to be careful with any parental contributions that might be assessed for income tax against the parent if the total of such contributions generates more than £100 in income (not difficult to trigger).

More importantly one should not underestimate the risks involved with 18 year olds gaining full access to potentially large sums of money (> £86,000 for a child born today, assuming zero net returns, maximum contributions remaining as they are today: the figure jumps to nearly £138,000 at age 18 with the modest assumptions of 4% pa net returns and maximum contributions rising by 2% pa) - Steven has referred to the risk above as a 'minor consideration', however that assumes that even a well brought-up, sensible and responsible child will not be tempted by the dark side, and unfortunately by the time such a child is subject to the test, it's too late to do anything about it if the outcome is not as hoped for.

Another option is to contribute £3,600 per annum to a child's pension, however accessibility is at the other extreme in not being able to be touched until the child reaches age 55 (under current legislation, and given the increase from 50 to 55 only recently one should not rule out the possibility that the minimum age will not be raised again).

Clearly a lot of money can be sheltered for children by parents with the disposable income / assets, but care is needed as these vehicles either allow access too early or too late to be ideal - the only wrappers that come close are trusts but are not easily 'packaged' or 'sold' to the public which is a real shame (but perhaps not that surprising given that all Treasury & spending ministers hate anything that loses state revenue in a significant way?)

djpreston

Snaj, aye trusts are fine but they're so restrictive in terms of tax.

Darron - I agree, in the main.

There do now exist bonds that are not so crappy on charges, have decent investment choice and are relatively 'tax-friendly' inside trusts - as always it depends on the specifics of the situation, but there's nothing mutually exclusive about the use of ISAs, pensions and trusts for a child - for substantial sums though, I would argue that the question of access as addressed by trusts should generally be considered ahead of the superior tax situation of ISAs and pensions.

Oh I agree snaj. Many of my clients and indeed the original core of our business was based around trusts, some many many years old and v large with all sorts of tax problems. Yep, some bonds are fine in some cases - thankfully charges have come down sharply.

Your main thrust about setting a more "reasonable" time to access funds other than 16, 18 or retirement. 25 or even 30 was quite usual for many of our trusts.

Darron

Yes, 25 to 30 is a reasonable access point as it ties in with hopefully seeing that the 'child' is mature, has lived a little and will hopefully no longer be a 'squander' risk - as well as that being a time when lump sums can be put to 'useful' activity such as home deposits, business capital, starting families, etc

Biggest problems with bonds: 1) charges; 2) poor investment choice - a few have improved significantly on these points in recent times, which should be a bigger story than is the case.

Regards

Don't you know snaj? All bonds are the spawn of evil and never appropriate.

Admittedly we don't use them often (and I'm not authorised to advise on bonds - I leave that to others) but the industry should be applauded for improving what's available.

Are you ready for Junior ISAs?

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Steven Dotsch

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