What you need to know about Junior ISAs

With Junior ISAs set to replace CTFs in November, Investment Week answers some key questions about the government’s latest initiative to save for a child’s future.

Junior ISAs are set to replace Child Trust Funds from 1 November and are the government’s latest initiative to help family members save for their child’s future.
Family and friends can contribute a maximum of £3,600 each year into a cash or a stocks and shares account. From April 2013, the limit will be raised in line with the consumer price index.

As with the adult ISA, any capital gains and income will be granted tax freedom.

Who is eligible?

The JISA is available to all UK residents under the age of 18 apart from those with a Child Trust Fund (CTF) – which applies to all children born between 1 September 2002 and 2 January 2011.

When can they access a JISA?

Except in cases of terminal illness or death, no withdrawals can be made before the child’s 18th birthday at which point it will automatically be converted into an adult ISA. However, the child can take control of the investment from age 16.

How does it differ from a Child Trust Fund?

The main difference between the two vehicles is that JISAs will not benefit from any of the government contributions a CTFs did (£250 at birth and a further £250 on the child’s seventh birthday), relying solely on funding from parents and relatives.

The issue of the JISA’s £3,600 contribution limit compared to the CTF’s £1,200 has been addressed with a rise in the CTF limit to meet the JISA later this year.

What are the advantages?

At a time when university fees are at a record level and deposits for first time buyers are soaring, the opportunity to provide a nest egg is certainly appealing.
In fact, contributions of £100 each month from birth to the child’s 18th birthday would generate over £39,000, when considering an average growth rate of 6%.

As with CTFs, the long term nature of investment into a stocks and shares JISA from birth increases the potential for some great returns. However, where one of the CTF’s greatest negatives was the lack of offerings (there are only 14 stocks and shares CTFs on the market) there is expected to be a much better choice of JISAs.

What are the disadvantages?

There do appear to be some teething problems, however. The main concern at the moment is that many platforms and providers are struggling to update their systems in time to offer JISAs from the 1 November. Another major issue is existing CTFs cannot be integrated with a JISA.

Who will be offering JISAs?

As with the adult product, most banks and building societies are ready to offer cash-based JISAs, while a number of fund houses such as Legal & General, M&G and Fidelity have confirmed their stocks and shares propositions.

Other groups are launching JISAs from slightly different angles: for example, Ecclesiastical and Scottish Widows have ethical and Shariah-compliant offerings respectively.

What alternatives are available?

• Children’s savings accounts: There are more than 60 accounts for families to choose from, many with attractive rates of interest. Halifax, for example, offers a Children’s Regular Saver Account, a one-year bond paying 6%.
• Children’s products from National Savings and Investments: A variation on the children’s accounts above, NS&I offer the likes of Children’s Bonus Bonds – a five year tax free product on which the full interest rate is paid when the bond has been held for the full term.
• Premium Bonds: The possibility of winning prizes from £25 to £1m has traditionally made these products a popular gift for children under 16. The bonds can be cashed in at face value at any time.

If JISAs has been in place 18 years ago, which funds would have been the top performers?

Of the 523 retail vehicles with an 18-year track record as of 30 September 2011, the leader was Jupiter European which returned 739.07% over the period, according to FE Analytics.

Other funds that would have given investors more than six times their initial capital include J.P. Morgan Natural Resources, up 651.86%; Halifax UK Growth, up 637.76%; Scottish Widows American Smaller Companies, up 607.29%; and Fidelity European, up 605.48%.