In an uncertain economic climate, financial planning is more important than ever and for anyone with a family, saving for the future has become a top priority. Giving your children a solid financial base insures they have the best possible start in life, whether they want to pay for driving lessons, embark on a course of higher education or choose another path.
Individual Savings Accounts (ISAs) are excellent ways of accumulating tax-free interest on your money but age restrictions limit their availability: cash ISAs are limited to the over 16s, stocks and share ISAs to the over 18s. However, recent changes in legislation have seen the introduction of the Junior ISA (JISA): a savings and investment scheme designed for the under 16s.
Who is eligible?
The Junior ISA was introduced on the 1st November, 2011. Designed to replace the older Child Trust Funds, those eligible for the JISA are:
· Children born on or after 3rd January, 2011
· Under-18s born before September, 2002
· Any child not qualifying for a Child Trust Fund, born between 1st September 2002 and 3rd January 2011.
Each account requires a single registered contact, usually a parent, or person with parental responsibility, who maintains the JISA on behalf of the child.
Unfortunately, children who already have a Child Trust Fund are not eligible for a Junior ISA (this restriction may change in the future, allowing funds to be transferred from the CTF).
How does the JISA work?
The Junior ISA subscription limit is £3,600, which means contributions to the account cannot exceed this amount per year (from 2013, the limit will increase to take inflation into account). Anyone can contribute to the account and neither you nor your child will be taxed on the interest it generates.
The contents of the JISA will not be available to the beneficiary child until he or she turns 18. At this point, the JISA will be converted into an adult ISA - or, alternatively, your child can withdraw the money to use for whatever purposes they have in mind.
In much the same way as adult ISAs, the JISA falls into two categories:
· Cash JISAs work in the same way as a savings account at a bank or building society. Money paid in grows as tax-free interest is added to it.
· Stocks and shares JISAs involve money invested on the stock market in shares and bonds. While gains may be significant, there is the added risk that their value may drop.
While a child is restricted to one cash and one stocks and shares JISA, any combination of funds, within the subscription limit, can be used across accounts.
Although JISAs have a lower subscription limit than adult ISAs (which currently stand at £10,680), they can generate can deliver substantial returns. A £300 per month investment over 18 years would grow to £114,876, assuming a 6% annual return. It's worth remembering however, like adult ISAs, the value of potential return can fall and it's important to monitor any savings regularly.