The kids will be alright with a Junior Isa

WHEN the coalition government revealed in May that it would be scrapping Child Trust Funds (CTF) from January 2011 to save £500m a year, there was an outcry from fund managers, financial experts and think tanks alike, who argued that the CTF had instilled a savings culture in children from an early age. More than 5m children have benefited from the CTF scheme introduced in 2002.

To fill the void left by the CTF, the Treasury announced earlier this week that it would be introducing a Junior Isa to satisfy parents’ appetite for a clear, simple and tax-free savings option for their children. It is intended that the products will be launched next autumn.

So how do these products differ from the CTF? Most importantly for parents and the UK’s balance sheet, there will be no government contribution into the account. The CTF attracted either £250 or £500 both at birth and when the child turns seven, depending on the household’s income. The Treasury intends that all returns will be tax-free and investments will be available in either cash or stocks and shares. The child will not be able to access their Isa until they turn 18.

Annual contributions will be capped, although it is not been clarified whether this will be at the previous CTF limit of £1,200 or higher, making it difficult for accountants to calculate the government’s lost tax revenue as a result of the junior Isa. Early indications are an allowance of £5,100 with up to half in cash and the rest in stocks and shares.

The Isa puts a wrapper around the child’s assets, making it easier to manage the tax treatment of any interest accrued – under current rules, if a parent gives money to a child as a gift, she remains liable to pay income tax on the interest if it exceeds £100 a year. Junior ISAs are unlikely to be subject to this. They can also be transferred easily and will reduce confusion around bare trusts.

The vast majority of the industry welcomed the government’s move as a means of instilling a savings culture from an early age. Chris Nicholls, managing partner at www.investment-advice-online.com, says: “The general public are much more aware and knowledgeable about ISAs than they ever were about CTFs, so this should encourage more people to invest for their child’s future. It encourages long-term investments, which have lower risk and can potentially see high returns.”

John Reeve
Family Investments

“It appears to be a CTF without the contribution, which begs the question as to why the CTF is not kept but without the voucher? Unfortunately, the timetable announced by the government also means that there will be at least a six-month gap between the end of the CTF and the Junior Isa introduction.”

Carol Knight
Tax Incentivised Savings Association

“We fully support this announcement. Following the decision that children born after the end of this year will not qualify for a Child Trust Fund there has been a real need for a scheme that is attractive to the consumer, is simple, provides choice, flexibility and variety and that is built on a brand they can trust.”

Adrian Lowcock
Bestinvest

“It is important to remember that children have their own personal income tax and capital gains tax allowances and are able to hold their own bank accounts. A Junior Isa should remove the existing process for investing on behalf of a child which is unnecessarily complex and lacks transparency.”