Magical Penny

A Junior Individual Savings Account (ISA for short) is a new financial product available in the UK (I can tell you’re excited already!)

Launching at the start of last month (November 2011) the product allows parents to save money for their children in a tax-efficient way, without needing to use their  own ISA and therefore saving their tax allowance for themselves.

What the UK Government has to say about Junior ISAs:

“Junior ISAs are a great example of a simple, clear and jargon-free financial product that allows families to save and invest for their child’s future,”

Mark Hoban, financial secretary to the Treasury

I wouldn’t exactly say they are jargon free but hopefully by the end of this article you’ll have a better idea about them and know why they are so worthwhile.

Firstly, some context: They were brought in to replace the Child Trust Fund that was introduced by the Labour government and scrapped by the coalition.

If you already have a child trust fund (CTF):

If you already have a CTF then you will not be able to apply for a Junior ISA, but you on’t miss out on the tax savings because the CTF investment limits have been increased from £1200 to £3,600 a year  -the same as the Junior ISA.

If you haven’t got a child trust fund for your child: 

If your child doesn’t already have a trust fund then a Junior ISA is something you should consider (even for older children who did not have the option of CTFs because they were born before 2002. And if your child is 16 years old they can open one themselves, and then convert it to a normal ISA at 18 (assuming they are sensible and don’t spend it on alcohol and parties!)

So what actually is a Junior ISA?

A Junior ISA for children  is, in many ways just like a standard ISA for adults – a savings account that allows you to save in cash or through stocks and shares, and not pay tax on your gains (you pay tax on interest from normal savings accounts but you might not realise it because it is automatically taken out of the interest you receive).

There are lots of advantages to investing in a Junior ISA:

•  It is tax efficient:  The Junior ISA allows your child to avoid paying tax on the gains from savings, meaning the money grows faster than it would in any other account with the same interest rate.
• It takes full advantage of the power of time: All money put in a Junior ISA is eventually rolled over into standard ISA at once your child turns 18 – keeping the tax free status…this is particularly brilliant as it means you’ve had more years to put money into the tax-free system for your child. If you had simply saved in a normal account and then wanted to transfer it into an ISA later on, you would be limited by how much you can put in an ISA in any given year. Saving in a Junior ISA consistently every year will allow you to save a substantial amount for your child.
• It teaches the lessons of saving: Opening a savings account that is not accessible but is transparent (you can see the balance) is an incredibly powerful tool for teaching children the lessons of saving. They will be able to watch the balance grow over time and if you have invested it in the markets you will also be able to teach and show them the power of compounding returns as well as demonstrating the concept of risk and return.
• It’s easy to pay into:  It’s really straight forward for donors to give. Adults paying into a junior ISA are not subject to full money laundering procedures usually associated to paying into other people’s savings accounts. This is important because it’s likely that the child themselves will not be paying into the ISA because they don’t have an income. But it’s easy for anyone, including grandparents and parents to pay into. What a great Christmas present!
• It’s possible to switch from Cash to Stock AND BACK AGAIN. Children can hold one cash and one shares Junior ISAat a time, with the maximum £3,600 a year split between them.With a standard adult ISA you can transfer funds from a cash ISA a stocks and shares ISA…but you can’t transfer back into the cash ISA without taking the money out of the tax shelter. However, with a Junior ISA it is possible to transfer between cash and stocks and back again as many times as you want. This is great if you are uncomfortable with the level of risk at any time as you can correct your asset allocation whilst allowing the money to remain the tax-free status of the money in the  Junior ISA.
• It’s perfect for parents to gift money to their child. In an ordinary savings account, interest exceeding £100 on any amount deposited by the parents will attract tax at the parent’s tax rate. Not so in a Junior ISA -it’s all tax-free.

Disadvantages:

• The money is locked into the Junior ISa and cannot be withdrawn until the child reaches 18. And it is always the child’s money once it enters the account. If you wanted more control you would have to skip the ISA, save in your own accounts and then give money to the child once they reach 18.
• The Junior ISA replaces the child trust fund, which the government made contributions to. But the Government does NOT make contributions to a Junior ISA. All together now: “BOOOOO!”
• There are ways to get around the tax situation without a Junior ISA. If a normal children’s savings account is funded by a grandparent or other generous relative who is not the parent, interest up to the child’s personal tax allowance – this year a huge £7,475 – can be socked away tax-free….without the restrictions of a Junior ISA.

 It’s a great product for helping you save for a child in your life.

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