The savings habit should be encouraged as early as possible and a Junior ISA is an ideal way, allowing even babies to have an account opened in their name.
Launched by the Government last November, the Junior Individual Savings Account (or Jisa for short) replaces the Child Trust Fund (CTF). All children under 18 are eligible who did not qualify for the CTF, which amounts to an estimated six million.
In practice, this means a Jisa can be opened for any child born before September 1, 2002 or after January 2, 2011. Up to £3,600 can be contributed every tax year by anyone, not just a relative.
This makes the early opening of such an account after a baby has been born appealing when friends and godparents, as well as parents and grandparents can make a contribution.
The funds grow tax-free with no tax paid on dividends or interest received and so this is an excellent way to build up a lump sum for the start of adult life. Any profits from investments are free from Capital Gains Tax.
At 18, the money will automatically convert into an adult ISA but alternatively the funds can be accessed and perhaps used to finance university fees or go towards a large expenditure like the deposit on a house.
However, the money is locked in with no withdrawals allowed until the 18th birthday. This means relatives can contribute in the certain knowledge any gifts cannot be squandered!
The account belongs to the child and providers say they will encourage youngsters to take control of the investment decisions once they reach 16 years.
Whilst the current annual limit is £3,600, any lower sum can be made subject to acceptance by the scheme chosen.
Remember that it cannot be backdated to a prior tax year which runs from April 6. The limit will be adjusted by inflation each year with the first such change in April 2013.
Whilst there will not be a Government contribution – as there was with the CTF – a Jisa has the capacity to build up to a serious investment. If £200 was saved monthly in a stock market account, it would reach £33,100 after 10 years and £78,500 after 18 years, assuming seven per cent annual growth.
If the maximum £3,600 was contributed annually, expect £136,600 upon maturity where a two per cent Consumer Prices Index increase has been factored into the calculation.
There are two types of Jisa:
• stock market investment;
• cash deposit.
Children who were eligible for a CTF are not allowed to open a Jisa and it is not possible to transfer between the two schemes. However, a little known fact is that 16-17 year-olds can hold both an ISA and a Jisa to the full tax limits, which means £14,280 can be sheltered.
Andi Murphy, at Leeds independent financial advisers AWD Chase de Vere, predicts that Jisas are “likely to become the most popular way for parents and grandparents to save on behalf of children.” They certainly combine efficiency, simplicity and a wide choice of investment options.
His fund recommendations include Neptune Global Equity, Schroder Global Emerging Markets, First State Asia Pacific Leaders and AXA Framlington UK Select Opportunities. Valuations are issued six-monthly.
Stockbrokers Redmayne Bentley tip M&G Global Dividend, which aims to deliver above average market yield. It is heavily focused on the US with major holdings in Intel, Reynolds American and Wal-mart (which owns Asda).
They also recommend L&G UK Alpha Trust, which looks particularly at smaller companies.
Investec Wealth & Management operate a Jisa which they manage on the child’s behalf, requiring the full £3,600 contribution. They focus initially on global equities but as the investment grows look to other asset classes and specific countries.
Hargreaves Lansdown, a noted private client stockbroker, offers one of the largest fund ranges and has an annual charge of just 0.5 per cent (maximum £45) with share dealing from £5.95.
Several friendly societies, which are mutual organisations owned by their members, have launched Jisas: Children’s Mutual (with a wide range of funds), Family (with both ‘balanced international’ and charities ethical options), Healthy and Sheffield Mutual (both with-profits funds).
If planning to invest regularly, check the limit accepted by a provider. It may be as low as £10 (such as Pilling, Post office and The Share Centre) but can be up to £250. The twin advantages of spreading the investment dates are to help cash flow and reduce potential volatility.
Watch the charges on Jisas. No annual fee is paid with Pilling or The Share Centre but can be £30 plus VAT (Witan), £25 plus VAT (Alliance Trust) or by a percentage (such as 1.65 per cent at Healthy Investment or 1.5 per cent at Family Investments, Post Office and Royal Bank of Scotland).
There may also be an initial fee (5-5.25 per cent at Artemis), administration charge (10 plus VAT The Share Centre) and commission (1.65 per cent Redmayne Bentley). Fidelity calculate that if the maturing Jisa – based on contributing the full allowance – was not spent but held within an adult ISA, even without adding a penny further, it would grow to over a million pounds by age 60.
Over the long savings period that most Jisas will run, it makes sense to opt for a stock market choice but the default position would be to opt for a cash version.
In real terms, the money will be eroded as the rates are well below inflation at 4.8 per cent. There are 21 providers, according to Money- facts.
The top interest rate is 3.50 per cent with Bank of Cyprus but is for existing customers only.
National Counties follow with 3.01 per cent with a 45-day notice for transferring out. The next best with three per cent are Beverley, Buckinghamshire and Skipton.
Monmouthshire and Nationwide also offer three per cent but include a bonus of 0.50 per cent and 0.90 per cent respectively which means you must watch for when such incentives end.
Some deposit takers will only accept children under 16 (Darlington, Nationwide) or 17 years (Dudley, Furness).