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Junior ISA rules confirmed

Kids | Child Trust Fund

By Justin Modray, published 28 July 2011.
Helpful? 23

The Government has today confirmed final details for Junior ISAs, to be launched on 1 November 2011. How will they work and will they be worthwhile?

The concept is the same as conventional ISAs - they're a tax wrapper that can surround cash or investments, making interest tax-free and ensuring no further tax is deducted on dividends.

What's different with Junior ISAs?

There are three key differences compared to conventional ISAs:

  • The annual contribution limit is £3,600 (not £10,680) until 5 April 2013, after which it'll increase annually with inflation (CPI).
  • There is no restriction how contributions are split between cash and stocks & shares (in a conventional ISA the cash contribution is capped at half the total annual allowance).
  • Children will only be able to hold one cash and one stocks & shares account at any time. So, unlike adults, they won't be able to potentially use a new ISA provider each year.

Which children are eligible?

All UK resident children under 18 who don't already have a Child Trust Fund will be eligible to open a Junior ISA - which basically means children born before 1 September 2002 or after 31 December January 2010.

When can the child get their hands on the money?

A child will be able to take responsibility for their Junior ISA from their 16th birthday, but will not be allowed to make any withdrawals until they reach 18. The only exceptions are on death or if the child is diagnosed with a terminal illness.

Assuming the child doesn't fully withdraw the money at 18 then the Junior ISA will be converted into a conventional one - after the ISA provider obtains the child's national insurance number and confirms they're still a UK resident.

Who can contribute?

Anyone can contribute into a child's Junior ISA, subject to total contributions not exceeding the annual limit. A Junior ISA can be opened by someone who has parental responsibility for the child and it'll be their job to manage it until the child reaches 16.

Will the government make any contributions?

No. It's too strapped for cash, which is why it stopped child trust funds (where the government did contribute some money on behalf of the child).

Will transfers be allowed?

Yes, but the child must stick to the rule of having only one cash ISA and one stocks & shares ISA account at any time (i.e. no more than one provider for each). However, it will be possible to transfer a Junior cash ISA into a Junior stocks & shares ISA and vice-versa.

What sort of choice will be available?

Too soon to tell. There are only a handful of child trust fund providers so Junior ISAs might suffer the same fate. Expect a few of the larger banks and some building societies to offer Junior Cash ISAs and hopefully at least one fund supermarket will offer a stocks & shares Junior ISA to ensure decent, cost effective, investment choice - child trust funds generally only offered overpriced trackers and a handful of expensive actively managed funds.

The rules covering what types of investments will be allowed within a Junior stocks & shares ISA will be the same as conventional ISAs - in broad terms most investments excluding shares traded on AiM (see our ISAs page for more details).

Can child trust funds be transferred into Junior ISAs?

No plans to allow this at present (although assuming Junior ISAs don't flop I'm sure it'll be allowed in future). The annual top-up limit for child trust funds will however be raised from £1,200 to £3,600, in line with Junior ISAs.

How much might a child build up by the time they're 18?

Here's a table with a few estimates and use our Junior ISA Calculator to get a clearer idea of how much your child might accumulate by the time they're 18.

Monthly Saving3% Annual Return6% Annual Return
£25 £7,138 £9,570
£50 £14,276 £19,140
£100 £28,552 £38,280
£200 £57,104 £76,560
£250 £71,380 £95,703
£300 £85,656 £114,844
Assumes monthly saving over 18 and annual returns are after charges.

Will Junior ISAs be worthwhile?

The cynic in me says what's the point? Most of the population can't afford to save enough for their own comfortable retirement, let alone save money for children or grandchildren.

However, there are probably sufficient numbers of parents and grandparents who can afford to save for children to ensure that Junior ISAs are viable. In that case their appeal will largely depend on choice, rates offered (on cash) and charges.

It's already possible to save tax efficiently for a child using a 'bare' trust (see our child savings page for more details). However, it's a bit of hassle and there are restrictions on how much interest a child can earn on gifts from parents before it's taxed as the parent's (£100 per parent per child).

So while Junior ISAs are unlikely to offer anything new, they should make tax efficient saving for a child more straightforward for some. And there might be some juicy interest rates on Junior cash ISAs at launch that could be worth taking advantage of.

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