After months of announcements and draft regulation statements, junior individual savings accounts--to be known forever more as JISAs--were launched this week. We’re big fans of ISAs at Morningstar: a saving product that enables you to save and invest in a tax-efficient manner certainly gets a thumbs up. And though parents will not be able to transfer existing CTFs into Junior ISAs, or vice versa, a child's parents, aunts and uncles, and grandparents can all contribute to the account. Certainly not all parents will be able to afford to take full advantage of the annual allowance of £3,600, but even a fraction of this total projected amount would go a long way to funding important developments in a child's life such as (ever increasing) university fees.
Below are some of the key characteristics of JISAs that you should be aware of before venturing into these saving products:
Tax-free Saving and Investing
The JISA allows parents, relatives and friends of the family to save cash or shares and funds, free of interest or capital gains, for a child until their 18th birthday, upon which the JISA will be transferred into an adult ISA. Only one JISA can be opened for each child, with an annual limit on contributions of £3,600. The annual allowance will rise in line with inflation from 2013; all interest or income generated is automatically reinvested.
A Replacement to the CTF
Any child born before September 2002 who does not yet have a Child Trust Fund scheme in their name is eligible for a JISA, as are all children born on or after January 3, 2011. For family members who already invest in a CTF for their chosen child, the annual investment limit is now raised to match that of JISAs--£3,600 rather than the previous £1,200 limit. The key change between JISAs and the former CTF scheme is that the government does not contribute to the former.
Stocks as Well as Cash
The fact that children and their parents can not only save cash—something that currently offers little (nay, negative) reward, given that inflation is outrunning interest rates at present—but also invest in shares and funds is welcome news. Not only does the low risk of cash come coupled with an even lower return, but young people are best placed to take advantage of the long-term performance of stock markets. An 18-year-old who had been gifted a tax-free investment in the FTSE 100 at birth would today be reaping returns in excess of 70%, and that's factoring in two financial crises, not to mention current expectations of a potential third.
Starting 'Em Young
One of the key benefits of JISAs, alongside the obvious eventual improvement to the young adult's finances, is the potential for getting your chosen child involved in saving and investing from a young age, thus hopefully leading to a financially-aware and -independent individual later in life. Read this article for tips on how to capture your child's interest in investing--anyone for a Buzz Lightyear ETF?
Handing Over the Reins
The recipient of a JISA can start to manage his or her investment at age 16 and at age 18 the JISA will roll into an adult ISA under the recipient's control. Between 16 and 18, the JISA holder is also eligible to save or invest in an adult ISA.
At present, only a handful of banks and building societies have unveiled their JISA rates, but this is expected to accelerate swiftly. Several fund platforms have already added JISAs to their services, some even come with a sweetener--a free toy for the young JISA recipient.
Read more on JISA here.
