Junior ISAs – As simple as ABC

The Junior ISA is a tax free account aimed specifically at UK resident children under age 18 who didn’t qualify for a Child Trust Fund (CTF). This also includes children born before the CTF was introduced on 1 September 2002 to ensure that they don’t miss out. Like the CTF, the child will own the account but will be unable to access it until they reach 18.

Up to £3,600 may be invested initially but, unlike an ‘adult’ ISA, this can be spread between cash and stocks and shares accounts in any proportion. Like a CTF, any person or organisation may make contributions on behalf of a child into a Junior ISA.

WHO’S ELIGIBLE AND WHO CAN APPLY?

Accounts will normally be opened by the person with parental responsibility for the child (known as the ‘registered contact’). Children who are eligible to open an account and are aged 16 or over will also be able to open their own accounts. The account will be managed on the child’s behalf until their 16th birthday at which time they may choose to take on the management responsibility. If not, they can leave it in the hands of the registered contact.

WHAT HAPPENS WHEN THE CHILD REACHES ADULTHOOD?

Junior ISA accounts will automatically roll over into a conventional ‘adult’ ISA when the child reaches 18 and assumes responsibility for it. At this point, the ISA provider must obtain certain details from the account holder including a residency declaration and National Insurance number before any subscriptions can be made. Additionally, the normal anti-money laundering rules covering ISAs will apply.

CASE STUDY

David and Karen are keen to provide their newborn daughter Georgie with a good start in life and want to start investing to provide a fund that could be used to cover the cost of university education or a sizeable deposit on a first home.

They open a Junior ISA on her behalf and invest the maximum contribution into a cash account in 2011, being nervous of stock market volatility. They continue to fund the maximum allowable on her birthday each year. By the time the account matures on her 18th birthday, Georgie has a sum worth in excess of £95,000 (assuming the contribution limit increases by the CPI target of 2% pa and the accumulated fund grows at 2.5% pa).

Despite the fact that the maximum cost of tuition fees alone for a three year university course for Georgie might amount to around £48,000 by 2029 (assuming fees inflation of 3.5% pa), her parents objective has been comfortably achieved.

(All assumptions are used purely to illustrate a principle and should not be relied upon).

IMPACT ON EXISTING CTFs

The Government has stated it has no current plans to enable CTFs to be transferred or merged into Junior ISAs but will consider this again once Junior ISAs are up and running, and will consult with interested parties. So as it stands existing CTFs will continue until they mature on the child’s 18th birthday and contributions can continue to be made up to the subscription limit. Interestingly this has now been aligned with the contribution limit for Junior ISAs (from £1,200 previously)!

IMPACT ON EXISTING ISA PRODUCTS

At present, a cash ISA may be opened by a 16-year-old. And as the eligibility rules have not been changed, it will be possible for a child to hold both a Junior ISA and a cash ISA and take advantage of both subscription limits (currently £8,940) once they become aged 16.

PLANNING CONSIDERATIONS

Despite the relatively modest contribution limit, those looking to invest over the longer term to provide a fund for their offspring will be attracted to a product that doesn’t penalise them from a tax perspective. This is particularly true given the absence of tax advantaged alternatives, NS&I having recently withdrawn its index-linked bonds for the second year running.

Duncan R Glassey
Senior Partner – Wealthflow LLP

duncan.glassey@wealthflow.com

This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.