The new Junior ISA launches on 1st November 2011 and the government has confirmed a 20% rise in the expected limit, from £3,000 to £3,600. In a nutshell, this means you can save more money for your children’s future in a tax-free environment (no tax on interest or capital gains). If you have children, this is welcome news and, the banks, building societies and other investment companies will cheer with you because they see this as an encouragement to save.
The new Junior ISA will replace previous Child Trust Funds (CTFs) introduced by the previous Labour government. These only had a £1,200 limit per child but were tax free on the interest and the capital gain on the child’s 18th birthday. The parents or family friends could contribute over the years for the future good of the child and encourage a savings culture.
Will your child qualify for the Junior ISA? The child must be under 18 and born before September 2002 (when the eligibility for a CTF started), and cannot already have a CTF. The new rules also include children born since 3 January 2011, the date that the old CTF eligibility finished.
Junior ISAs can be invested in cash or stocks and shares as long as the £3,600 limit is not exceeded. You can choose to have one of each type up to this limit (so two in all). The funds can be switched between different providers.
When the 18th birthday arrives, the account will change to a normal adult ISA, which is currently limited to a maximum of £5,340.
If your child has an existing CTF, you will not be able to take out a Junior ISA as well. However, the CTF can still run alongside and the limit will be raised to that of the new Junior ISA.
Unlike the CTFs where the government contributed up to £500 at birth and £500 on the child’s 7th birthday (now scrapped anyway in 2010 as part of the cuts), the junior ISA is down to the parents or friends to fund. Stefan Maryniak of uSwitch.com labeled the new product as “the rich man’s Child Trust Fund” as “only the well-off will be able to take advantage”.
The money is locked away until the child is 18 but instead of seeing the fund as a kick-start for university or flat deposit, it can be squandered on high living. Sweet babies change a lot in 18 years and their future prodigal son can squander good parent’s intentions.
One UK Money Market tip: – it would be wise to keep a sharp eye on the interest rates for existing CTFs now that they are not so newsworthy and financial institutions will likely offer their best rates to the new Junior ISA.
On launch day, 1st November 2011, there will be an estimated six million under 18s who will be eligible for the Junior ISA with a further 800,000 more every following year.