Faced with the increasing costs of further education and children struggling to get onto the housing ladder, many parents are looking for ways to save for their children’s future from an early age.
The Junior Individual Savings Account (known as JISA), launched in September 2011, has been a popular alternative to the Child Trust Fund and is available for children born before 1 September 2002 and after 1 January 2011 (children born between these dates were eligible for the Child Trust Fund and cannot subscribe to a Junior ISA).
In many respects, the Junior ISA works in a similar way to adult ISAs. The ISA is simply a tax free wrapper that can contain investments such as stocks and shares and cash savings accounts. The Junior ISA limit for the current tax year is £3,840, rising to £4,000 from 1st July 2014 and unlike adult ISAs, there is no limit as to how it can be invested – the whole of the ISA can be held in stock market investments, or cash, or a combination of the two. Another benefit the Junior ISA holds over its senior brethren is the ability to freely convert the ISA from stocks and shares to cash and back again as many times as you wish, whereas the adult ISA can only convert from cash to stocks and shares once (and not be converted back again).
The Junior ISA can only be opened by the person with parental responsibility for the child, unless the child is aged 16 or over; however, the ownership of the ISA from day one remains with the child. Once set up, anyone can contribute to the ISA, not just parents or legal guardians.
Access to the Junior ISA is strictly limited until the child reaches the age of 18; however early access is allowed in exceptional circumstances such as the diagnosis of a terminal illness. At the age of 18, the Junior ISA automatically rolls over into an adult ISA, and is accessible from this point onwards.
There is a modest range of ISA providers offering both stocks and shares and cash Junior ISAs, with an increasing number coming into the market as the product becomes more popular. Many cash-based ISAs can be opened with a deposit of as little as £1, whilst most stocks and shares investments require regular investments of a minimum of £50 per month.
The Junior ISA can be of real benefit to parents who regularly gift sums of money to their children. Current Income Tax legislation has been designed to stop parents placing large sums into their children’s names for the purposes of tax avoidance and does so by limiting the amount of income that can be earned on the gifted money to £100 per annum. If the income exceeds this level, the parents are liable to income tax at their highest marginal rate on all of the income earned income earned by the money gifted. The Junior ISA neatly sidesteps this as the money is held in the child’s name, and as the parent cannot get access to the funds, the tax penalties do not apply.
The downside to this useful tax advantage is that ownership of the Junior ISA is the child’s from inception, and once a child reaches their 18th birthday, they are free to use the funds how they wish, or continue to leave them invested. This may be a cause of concern for some parents, who may be worried about their hard earning savings being frittered away and not put to good use. If this is a worry, then alternative strategies can be considered which offer greater flexibility along with increased control over access to the funds in the future.