“I hear I can now save more for my children”

We often get clients approaching us wanting to put money away for their children’s benefit in the future. With the depositJunior ISA needed to buy a first house ever increasing and the cost of university at £9,000 a year a fund in early adulthood will be of great benefit to children and will save parents having to find large sums of capital at that time. So what can you do?

1st November saw the launch of Junior ISAs. Junior ISAs have replaced Child Trust Funds and while they will not benefit from government funding they have some distinct advantages:

  • The annual investment limit is £3,600 (this will increase each year from 2013).
  • Growth and income received within the Junior ISA account will be free from capital gains and income tax.
  • There is expected to be a wider range of providers offering a wider range of investment options.
  • You can pay with a lump sum each year or through smaller regular contributions to suit your disposable income position.
  • Access will not be available until the child reaches 18.

The sooner you start saving the greater the chance you have of building up a larger fund. This is simply because there will be more contributions going in over time and you will benefit from compound interest. For example, investing the maximum £3,600 each year and receiving an average return of 5% pa after charges will produce a fund at 18 of over £100,000.

You will be able to build a portfolio of funds in which to invest to suit the risk you wish to take. If you wish to accrue as big a fund as possible you are more likely to be exposed to more volatile shares. If you don’t want to see a large variation in the value of the fund each year you may wish to invest more heavily in less risky assets such as fixed interest securities.

It is also possible for others to make contributions to the Junior ISA as long as the total each year does not exceed £3,600. This can be an effective way for grandparents to reduce the value of their estate for inheritance tax purposes over time; gifts of £3,000 per person per year can be made free of future inheritance tax.

One of the potential disadvantages of the Junior ISA is that at age 18 your child will become the owner of the capital to do with it whatever they wish. While your intention may to be fund university or a house purchase you may find that a motorbike has been purchased or the capital used to fund a post A-level trip to Ibiza.

There are other options to Junior ISAs:

  • If you have a Child Trust Fund you may wish to continue to invest in that, particularly if you are not going to exceed the maximum each year.
  • You could save via National Savings & Investment products. Premium Bonds and Children’s Bonus Bonds are tax free but the returns you receive are unlikely to keep up with annual inflation.
  • You could save or invest the capital in your name to keep control of the money but you would pay tax at your marginal rate.
  • Assets could be put into trust so that trustees have the control over distribution of capital. The downside to this is the administration and potential tax to pay on trusts.

So, if you are looking to ensure your children can afford university or have capital for a property purchase or a gap year starting early and investing in a Junior ISA may well be a sensible strategy for you.

If you would like to receive advice on Junior ISAs click here.

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5 Comments

  1. We all want to look out for our families’ best interests. The junior ISA fund will allow us to do just that. In these times of rising costs, it’s great to see such initiatives for families who don’t have such great financial resources.
    Katie Leaver, LondonlovesJobs

    • Thanks for another insightful comment Katie. If we can put anything at all away it all helps in the long term. Those with debts to pay off or have no emergency fund may prefer to concentrate on sorting this out first.

  2. No matter how many times I read it, it still baffles me that people don’t seem to understand you can not save for tuition fees. Even if you could afford to pay them upfront you have to get a loan for it. You CANNOT pay them upfront so parents saving for this are wasting their money. Parents have always been able to save as much as they want (if they can afford it) for their children – the difference is that the Junior ISA isn’t taxable.

    • Thanks for your comments. I would say people can save for tuition fees. The amount they have available to them, the timeframe they have and the risk they choose to take with the investment will determine what pot will be produced when it is needed and whether they will need a loan on top.

      • What I meant was, that the rules regarding tuition fees means that even those with the money cannot pay upfront, so have to take out a student loan. They are the rules, so even if you had £100K you couldn’t pay the tuition fees with it. Of course, if you have this money in the bank paying off the loan is less of a worry, but you still have to take it out before your studies and cannot pay it back until you’re finished.