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Every week Clare Francis, financial journalist and editor of comparison site moneysupermarket.com will offer tips and advice on all things money-related to help iVillagers make the most of their hard-earned cash. From energy bills to car insurance; credit cards to children’s savings accounts; mortgages to discount vouchers Clare will show you how to make sure you’re getting the best deal

Junior ISAs - a new way to save for your child

By Clare Francis on 02 Nov 2011 No comments

A new savings scheme for children was launched November 1st 2011. Junior ISAs enable parents (grandparents and other friends or relatives) to save up to £3,600 a year for a child’s future, tax-free.

With university costs on the up and high property prices making it harder to get onto the property ladder the government wants to encourage parents to start putting money away for their children from a young age. Up until January 2011, newborn babies received a voucher from the government to be invested in a Child Trust Fund CTFs. Parents were then able to invest an additional £1,200 a year into the account.

However, CTFs were one of the first victims of the coalition government’s cutbacks and the scheme was scrapped at the start of the year. Junior ISAs take their place but there is a notable difference: there will be no government contribution.

That said, they do offer a tax-efficient way of saving for your child’s future and figures from Fidelity, an investment firm, show the benefits long term saving can have. If you are fortunate to be able to invest the full allowance each year in a Junior ISA from birth until your child is 18, they could have a savings pot worth £124,168. That assumes that the annual allowance, currently £3,600 rises in line with inflation and that the value of the investment grows by 5% a year.

Who’s eligible for a junior ISA?

Children born between 1 September 2002 and 1 January this year were eligible for CTFs. However, those under the age of 18 born before September 2002 and new babies who have arrived since January this year can have a Junior ISA.

What is a Junior ISA?

As with regular ISAs, there are two main types of Junior ISA: cash or stocks and shares.

Cash Junior ISAs are like standard savings accounts, the difference being that all returns are tax-free. Children can currently earn £7,475 before they’re liable for income tax which obviously means most don’t pay any tax because they don’t work and their savings don’t generate that much in interest. However, the benefit of ISAs is that it will remain tax-free for as long as it is kept in the ISA.

The money will be locked away until the child reaches the age of 18 and unless he or she wants to cash in the investment at that point, it will be converted into a standard adult ISA.

A stocks and shares Junior ISA offers a wider choice of where the money can be invested as you can choose from investment funds, shares, bonds and gilts.

Most parents are expected to opt for cash ISAs although experts say that, over the long term, stocks and shares ISAs offer the potential for better returns.

Is there a lot of choice?

There’s been a disappointing response from banks and building societies with regards choice for cash ISAs.

Nationwide Building Societyis offering a Junior ISA paying 3.00%, as are Skipton and Buckinghamshire building societies. Bank of Cyprus has a rate of 2.75% and Furness Building Society has launched an account paying 2.75%.

Once you’ve opened a Junior ISA for your child, you can switch it if the interest rate becomes uncompetitive or a better account is launched.

There is more choice with stocks and shares Junior ISAs as you can basically invest in any investment fund or even directly in shares. Take a look at The Children’s Mutual, Family Investments and companies such as Fidelity Fundsnetwork and The Share Centre if you are interested in the stocks and shares option.

What about those with child trust funds?

At the moment you can’t transfer money invested in a CTF into a Junior ISA (although this is something the government is looking into). However, the good news is that the amount you can save into a CTF has risen from £1,200 to £3,600 a year to bring it into line with Junior ISAs.

And other savings accounts for children?

While many parents will want to save for their children’s long term future, what about birthday, Christmas and pocket money?

You may not want this to be tied up in an account that can’t be accessed until your son or daughter reaches 18. After all teaching children about the value of money and the benefit of saving is also important and one of the best ways of doing this is for them have savings and make choices on what that money is spent on.

Most of the main banks and building societies offer children’s accounts and many allow easy access money can be paid in or withdrawn at any time.

Newcastle Building Society’s Big Little Saveris paying 3.02%, while Northern Rock’s Little Rock Instant Access Issue 2 Account offers a rate of 3.00% as does Lloyds TSB’s Young Saver Account.

If you open a savings account for your child, complete an R85 form – this will ensure that the interest they earn isn’t taxed.