Save like a superhero – what to do to protect your children’s future

Philip Salter
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COLUMN inches are being racked up, extolling the virtues of getting your child a Junior Isa. And surely nobody could decry a tax wrapper that aims to build a stash of cash for the next generation? However, there is a potential problem – and it’s not the abolition of the £250 cheque the government handed out with Child Trust Funds (CTFs). The problem is that at the age of 18 your child will have complete freedom to do whatever he or she wants with the cash.

As Murray Smith of Mattioli Woods explains, to be eligible for a Junior Isa children must be resident in the UK and:

■ Be born on or after 3 January 2011.

■ Be under 18 and born before September 2002.

■ Not already have a CTF if born between these dates.

“Children with existing CTFs are not,” Smith adds, “eligible as they would otherwise be receiving double tax efficient savings allowances – however, CTF limits have also increased to £3,600 per annum from November 2011.” It may only be a matter of time before CTFs are merged into Junior Isas, although the slow wheels of bureaucracy are frustrating many.

As Jason Hollands of F&C Investments says: “It makes sense for parents to utilise their own Isa allowances ahead of potentially funding a Junior Isa, even if the intention is to eventually utilise the proceeds for the benefit of their children (e.g. school or college fees).” He gives three reasons for this: a lack of access, efficiency and control.

Hollands explains that “unlike an adult Isa, which can be fully or partially cashed in at any time, money in a Junior Isa is tied up until 18 when the funds can be accessed or converted into an adult Isa.” This makes Junior Isas ideal for saving up for university costs, but less useful as a school fees planning tool.

“The tax benefits of an Isa are more relevant for a working parent,” explains Hollands, “particularly a higher rate tax payer.” After all, few children earn more than the personal allowance, which will rise from £8,105 to £9,205 in April 2013.

The proceeds of a Junior Isa legally belong to your children at 18 and their priorities – e.g. a big party – may not be consistent with the parents’ wishes, says Hollands. Funds saved through an adult Isa can be released to the child as and when the parents see fit. This last point is critical. As Smith explains: “If £3,600 was contributed every year for the next 18 years (a total of £64,800), which received a return of 5 per cent a year (after charges), the Junior Isa will have grown to over £106,000 (before taking into account inflation).” That’s a fair chunk of change for most 18 year olds to have access to.

Adrian Lowcock of Bestinvest suggests the following order of priority for investors: Isa, Sipp or pension, followed by a Junior Isa.

Although Junior Isas shouldn’t be the first port of call, saving for children is a must – especially given the government’s growing deficit and debts. Michael Garvey of Edinburgh Wealth Management believes “the bank of Mum and Dad” will have to continue to lend freely. He does the sums:

■ Anticipated cost of student debt for a 2012 fresher: £59,100.

■ Average wedding cost: £15,500.

■ Average first time buyers deposit: £29,439.

■ Average graduate salary £25,500.

For those with the means, how much money to give to your children is a ubiquitous moral quandary – particularly for those who haven’t always had it so good. Access to over £100,000 at the age of 18 could be setting your children up for a fall. That he or she will know to expect it before undertaking A-levels – or the equivalent future examination – is a gamble.

Spiderman advises that with great power comes great responsibility, but in this instance his tingling spider-sense might not be so keen. Much will come down to predicting the personality of your progeny. Not a problem if you have a Peter Parker, but if your 18-year-old child is closer to Norman Osborn (Green Goblin) you will end up wishing that you had more control. Of course, if your offspring turns out to have the personality of a green goblin, wasting your money on a Junior Isa won’t be the top of your list of regrets.