One week to go before you can give your child £118,000 tax-free
The Government has ramped up how much you'll be able to save in a Junior ISA, and there is only one week to go until you can start saving.
On November 1st, parents will at last be able to start saving tax-free for their children in Junior ISAs.
What's more, the amount that can be saved each year in these soon-to-be-launched Junior ISAs has been increased from the original limit of £3,000 to a new limit of £3,600.
A number of rules surrounding the accounts have been clarified, including the fact that both cash and stocks and shares ISAs will be available.
Here are the key features of the Junior ISAs, confirmed by the Government:
- All UK resident children under the age of 18 who do not have a Child Trust Fund will be eligible for Junior ISAs.
- All income or gains will be tax-free.
- Children will be able to hold up to one cash and one stocks and shares Junior ISAs at a time.
- There will be a contribution limit of £3,600, which will be indexed with the Consumer Prices Index from April 2013 onwards.
- Accounts will be owned by the child, with the funds locked in until they reach 18.
- Children will manage the accounts from the age of 16.
- On maturity, Junior ISAs will automatically become adult ISAs.
An extra £20,000!
The big news is of course the increase in the annual limits. An extra £600 a year may not seem a huge amount, but over 18 years and with compound interest taken into account, it can make a huge difference.
When the initial plans were published, Hargreaves Lansdown estimated that if parents manage to save the full amount, and the investments manage to secure an average return of 6% across that timescale, then the child may be looking at a windfall of a little more than £95,000 upon maturity.
However, with this increase of the limits, children may now be looking at a return in excess of £118,000. That's an extra £23,000!
Gone 'til November
A number of stocks and shares providers have come forward to confirm they will be offering deals, and some of the details behind those deals. Let’s take a look at what we know so far.
The Children’s ISA
A new firm, The Children’s ISA will be offering accounts with a minimum investment of £10.
There will be Cautious, Balanced and Adventurous options in terms of the funds the account will invest in, while you can also choose between low cost, actively managed, ethical and sharia funds.
Prudential will be the fund managers for the active managed options, while the low cost option will be run by Total Clarity Funds.
Fidelity has confirmed customers will be able to invest across the firms’ range of funds and investment trusts, as well as use the firm’s fund supermarket to access funds from other providers.
One of the big providers of Child Trust Funds, Family Investments will be going live with a Junior ISA.
Again minimum investments will stand at £10 a month, while an ethical version will be available.
A raw deal
The confirmation of the regulations surrounding Junior ISAs comes at a good time, as new research by Which? has revealed just what a terrible deal young savers get from banks and building societies.
The firm’s study of savings accounts for young people found that the average rate of interest on easy access accounts stands at a pathetic 1.01%.
Indeed, half of children’s easy access accounts pay 1% AER or less, with one account – the Junior Saver from First Trust Bank – paying just 0.05%.
Clearly in many cases young people who are making the effort to squirrel money away, to get into the habit of saving for when you may need that money, are being ‘rewarded’ with appalling rates of interest. Is that really any way to teach young people the value of saving? Surely it’s not beyond account providers to offer accounts that are at least respectable compared to their adult counterparts?
A wasted effort?
Junior ISAs were launched to replace Child Trust Funds, and for all that an increased top limit to contributions is a good thing, it’s still very likely that only a fraction of children will ever really benefit from the accounts.
The big selling point of Child Trust Funds was that it wasn’t down to the parents to get the ball rolling – all newborn babies were given a £50 voucher, enabling them to open a fund. And so even children born to parents who perhaps are not particularly financially literate were able to benefit from knowing that at 18, they would at least have some money in savings which could go towards a deposit on a house, or university costs. It was a way of giving parents a nudge into saving for their children’s future, a laudable aim.
With Junior ISAs there is no such voucher to get you started. No doubt many people are happy about that – after all, with the economy in the state that it’s in it’s an obvious thing to cut.
But parents clearly need to be given a decent prod to start saving for their children’s future, and increasing the amount parents can save in a Junior ISA is not really going to cut it, especially for low income families.
This article has been updated recently.