What is the point of Junior ISAs, launched today?
I am smug. I had the foresight to have got myself knocked up during the golden age of the Child Trust Fund (CTF). This meant that the Government gave me two cheques for £250, one for each of my children, that was duly invested in a stakeholder CTF. The money will remain invested for my children until they reach age 18, at which point, the funds may be worth the £500 I originally got…
Anyway, today the Government’s response to the deletion of the CTF scheme goes live. Junior ISAs are, perhaps unsurprisingly, a junior version of the popular tax-free ISA savings and investment scheme and only available to those who do not hold a CTF. Grown up ISAs can only be taken out by those aged 16 or over, but Junior ISAs, or JISAs as they will probably be known, cannot be encashed until the child reaches 18.
This time there is no Governmental contribution, but family or friends can pay money into a child's Junior ISA, run by banks, building societies and investment groups, up to a total maximum annual contribution £3,600. This can be entirely in a cash Junior ISA, or an investment version made up of shares, bonds and investment funds, or split across both, in a similar way to adult ISAs. However, although the investment limit for ISAs now increases each year in line with inflation, there is no such rule for JISAs, and the £3,600 limit will remain as it is. At least until it gets changed. If you do not use a year’s allowance, you cannot roll it over to future years.
So far, the banks are wary of entering the market, with only Lloyds TSB from the High Street banks suggesting they will launch a JISA product. Many potential providers have yet to publish their rates.
"Some of the larger names in the savings market are keeping their Junior Isas under wraps for the time being, in anticipation of what their competitors may be launching," said a spokesman for financial information service Moneyfacts told the BBC.
What’s the point?
The banks’ reluctance hints at the mostly ridiculousness of this new scheme, particularly the Cash JISA market. The rates for these savings JISAs are likely to be lower than standard children’s savings account offerings owing to the extra compliance and complexity involved in a Government scheme. The money is also tied up for a 18 years, with no withdrawals permitted at any time before that date. But what about the JISA’s big selling point, its tax free status? Well, given that every child also has a personal allowance for income tax purposes of £7,475 a year, would the maximum permitted investment ever generate a tax liability?
If a baby born this year took advantage of their JISA allowance every year until 2029, assuming (generous) annual interest of 4% a year, the JISA would be worth £122,400 on maturity. Even 4% of the maximum £122,400 is only £4,896, so the interest would not be taxable anyway, unless the child had other income in their own name.
The only exception to this would be the situation where the parents are the sole providers of the child’s interest earning balances. A cynic might say that a wealthy parent could stick a wodge of cash in a children’s bank account to earn up to £7,475 in interest tax free. Multiply that by a number of children and that’s a nice little earner. However, the taxman is already wise to this scam, and where interest earned on sums provided by parent’s exceeds £100, then the interest needs to be included on the parents’ tax returns, and taxed at their marginal rates, instead. Given an assumed interest rate of 4% again, this would equate to a capital sum of £2,500. This rule does not apply to grandparents, aunties, godparents or anyone else who can be reliably tapped up for cash for your kids.
As a result, JISAs will only be of any use to a narrow group of middle class individuals who have sufficient spare cash to siphon into their own childrens’ accounts, but not enough money to use trusts or other more flexible structures, where the capital and interest can be accessed at any time.
Makes me feel better about not being eligible for one.