Junior Isas to match adult savings funds

IN LAST month’s budget, the chancellor announced the arrival of the Junior Isa scheme, which will become available in November of this year. The Junior Isa is a replacement for the Child Trust Fund (CTF), but will do away with the government contribution of the previous scheme (see the table below).

The Junior Isa will mimic its grown up equivalent with no capital gains tax, no income tax on savings and no further tax on dividend income. Withdrawals from Junior Isas will not be permitted until the child reaches 18. Eligible children over the age of 16 will also be able to open Junior Isas for themselves.

6m children will be eligible from the outset, followed by around 800,000 per year. Based on the amount of parental contributions made to the Child Trust Fund scheme, it is expected that it will see an uptake in the name of some 1.2m children.

Danny Cox, head of advice for Hargreaves Lansdown, is optimistic about the new scheme. “Junior Isa has the potential to be the most successful children’s savings scheme of all time. The Child Trust Fund was well intentioned, however, the regulations made it difficult for investment providers to set up viable business models. Junior Isa is different in that the annual contribution is higher than the CTF and hopes to capitalise on the phenomenal success of the Isa.”

Tom Stevenson, investment director at Fidelity International, says: “We welcome the chancellor’s announcement on Junior Isas and believe this is a really positive move which endorses the idea of saving from as early an age as possible. Young people often have the greatest opportunity to benefit from the long-term performance of stock markets and the Junior Isa will allow them to do so in a tax-efficient way, while also learning about the benefits of saving.”

Figures from the 2011 Barclays equity and gilt study indicate that for longer-term savings, a stocks and shares Junior ISA should produce a much better return than cash. There is a 99 per cent probability that stock markets will outperform cash over 18 years.

As the standard disclaimer goes, “past performance is no guarantee of future results.” However, should Junior Isas provide the same returns as their adult stablemate, then the scheme should more than fill the gap left by CTFs.