The long awaited Junior ISA (Individual Savings Account) is launched today.
The Junior ISA will replace the Child Trust Fund, which was introduced by the last government, and was aimed at producing a lump sum of money for children as they turned 18.
In many ways the Child Trust Fund was a flop with only one in five accounts being added to by parents or grandparents, leaving most accounts with just the government contributions.
Child Trust Funds received a government contribution of £250 when a baby was born plus an additional payment when the child reached the age of seven.
Unlike the Child Trust Fund the new Junior ISA will receive no government payment.
The new Junior ISA will be available to any child under the age of 18 and without a Child Trust Fund. In many respects it will work in a similar way to the adult version of an ISA, providing a tax efficient savings environment with options to invest in both Cash and stocks and shares.
The maximum contribution will however be lower than the adult version and will be limited to £3,600 per year.
The new Junior ISA will work in a very similar way to the adult version when it comes to tax with the savers in the Junior Cash ISA paying no tax on the interest. Whilst most children are not tax payers, any interest they receive above £100 as a result of savings made on their behalf by parents is taxable at their parents highest rate, experts therefore believe that the new Junior ISA should be taken advantage of.
Tony Vine-Lott, the director general of the Tax Incentivised Savings Association (TISA), said: “Bearing in mind that this is a long-term investment of 18 years, parents should make full use of the higher contribution limit and regularly review the investment performance.”
The government has decided that it will not allow the savings held within a Child Trust Fund to be transferred into a new Junior ISA.
It will however allow contributions to a Child Trust Fund to be continued and has increased the maximum annual contribution from £1,200 to £3,600, equal to the new Junior ISA. There are however fears that the focus for the best interest rates and lowest charges will be on the Junior ISA and not Child Trust funds.
To a degree this fear is already being proved.
The Skipton Building Society will pay 3% gross AER on their new Junior Cash ISA compared to 2.65% gross AER paid on their Child Trust Fund. The UK largest building society, the Nationwide is also a culprit, paying 3% gross AER on the Junior Cash ISA and 2.1% gross AER on their Child Trust Fund if £20 per month is paid in, for accounts where less is paid in each month the interest rate falls to a very unattractive 1.1% gross AER.
You can see which banks and building societies are offering the best interest rates by using our Junior Cash ISA best buy table.
For those savers who do not want a Cash investment but prefer stocks and shares the fear is that charges will be lower on the new Junior ISA than the Child Trust Fund.
Child Trust Funds offered ‘stakeholder’ style accounts which limited the annual management charge to 1.5% per year, approximately one in three Child Trust Funds were ‘stakeholders’ and usually invested in tracker funds.
The concern amongst some is that 1.5% for a tracker fund is expensive and again the new Junior ISA will be better value. Two of the largest providers of Child Trust Funds, the Nationwide and the Children’s Mutual both charge 1.5% per year for running tracker funds in their CTFs, in comparison Fidelity and HSBC who will both offer trackers charged at just 0.3%.
Neither HSBC or Fidelity currently offer a Junior ISA, although Fidelity plan to do so soon, but the figures just show how cheaply a tracker fund can be offered.