Why We Like Junior ISAs

November 15, 2012

We are big fans of Junior ISAs

Junior ISAs can be opened to anyone aged less than 18 who is not already eligible to have a child trust fund. That means children born before September 1, 2002, or after January 2, 2011.

The maximum yearly contribution for a Junior ISA is currently £3,600, but this will be uplifted in line with the Consumer Prices Index measure of inflation from 2013/14 tax year onwards. Until then, parents, grandparents, other relatives and friends and the children themselves can contribute up to £3,600 a year.

All the money saved or invested in the Junior ISA account belongs to the child and will be locked away until they reach adulthood at age 18. Money in the account can be put on deposit or invested in stocks and shares.

Junior ISAs are tax-free savings vehicles for children and the successor to child trust funds which were scrapped in January 2011.

Taking the long view

Look at your children now and you’ll foremost think of their education, marriage or career, not retirement. Now, though, with the introduction of Junior ISAs it may be a smart move to set them up with a stocks and shares ISA for their retirement.

Just imagine, you as parents and/or grandparents, bankrolling or subsidising an annual £2,000 Junior ISA contribution for just five years, starting when the child is at age 13? You are just putting your teenager in line for them to potentially receive £10,000 annual tax free retirement income from that original seed money, when they retire.

In fact: you are gifting 50 years of compound growth.

Why not get your kids to participate?

Your child doesn’t need to fork over all his or her own savings to fund their own ISA. But why not offer to match their contribution to get them interested in long-term saving and investing?

Teach your children proper money saving habits and get them in “saving mood” by offering a generous matching contribution.

Stimulate them to save via a Junior ISA and match part of their wages from any job – washing your and your neighbour’s car, babysitting, mowing lawns, waiting tables – when they invest some of it in their ISA? Say, for every pound they contribute, you pitch in £10. Or £20. That should make Junior ISAs fly with your teens.

Helping your children to grow wealthy is something that your children will certainly thank you for, when they eventually come to understand the significance of managing their own money wisely. This gratitude may not come until your children are a little bit older, perhaps even into their mid teens. However, eventually they will come to know and reap the benefits of the money management principles that you began to plant in their minds from their early childhood years.

Get the family involved

Once launched, Junior ISAs should be popular with grandparents, aunts and uncles. They should enjoy knowing that they are helping to build something, not just giving away money without a goal.

Also giving ISA contributions is a smart way to transfer assets from one generation to another. The £3,600 maximum Junior ISA contribution almost equals the 2011/2012 allowance to give away up to £3,000 each tax year, per person, or £6,000 a year for a married couple. Consider splitting your allowance to cover all your under-aged grand children.

A minor consideration

Keep in mind that from the age of 16 the recipient can take complete control of the ISA account. At 18, the Junior ISA account converts into a full-blown ISA and the new adult can do what s/he likes with this pot.

So you might want to start talking with your kids now about what your hopes and wishes are for this money, and how that may not include any early withdrawals for a drink binging weekend at Magaluf, at 18, or a car.

That said, an ‘adult’ ISA can be accessed well before your (grand-)child hits retirement age. All contributions as well as the returns can be withdrawn, fully tax-free, at any time. Nor any early withdrawal penalty or any income tax are due based on current tax legislation.

The small print

There are two types of Junior ISAs: one for cash and the other for stock and shares, and children can have one of each. As with adult ISAs, Junior ISAs protect savings and investments from the taxman, which means no capital gains tax, no direct tax on dividend income, and no income tax on savings interest.

Final quirk

A strange quirk in the ISA rules allows those in their 18th year to invest in both a Junior Stocks & Shares ISA and an ‘adult’ Stocks & Shares ISA in the same tax year. This means £14,280 can be invested in an ISA – in a single tax year!

Here’s how it works:

Junior ISAs allow subscriptions until the eve of the child’s 18th birthday. From 6 April one year until 5 April the next year up to £3,600 can be invested into a Junior ISA.

On a child’s 18th birthday they become entitled to the full ‘adult’ ISA allowance of £10,680. Subscriptions made to the Junior ISA currently have no bearing on the ‘adult’ ISA allowance. This means that in their 18th year between 6 April and their 18th birthday Junior ISA contributions of up to £3,600 can be made and between their 18th birthday and 5 April ‘adult’ ISA contributions of up to £10,680 can be made.

For one year only your child could make contributions of up to £14,280 into tax privileged ISAs (tax year 2011/12).

What is there not to like with the introduction of Junior ISAs?

What next?

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