Tax-free junior ISAs to be launched
Parents saving for their children’s future have been given a boost as the government announces plans to launch junior individual savings accounts.
The new tax-free savings vehicle will do the same job as child trust funds (CTFs), which were scrapped back in May, but will not include contributions from the government.
From 31 December 2010 government contributions to CTFs will stop altogether, they have been gradually scaled back since May.
Junior ISAs will work in much the same way as CTFs, with children unable to access the funds until they turn 18.
Money paid into the account will go under the child’s name and it is thought there will be an annual cap of a couple of thousand pounds, although details are yet to be decided.
Parents will also be able to invest in stocks and shares for their child, in the way they can themselves within adult ISAs.
Announcing the new junior ISA plan, Mark Hoban financial secretary to the Treasury, said: “I am committed to ensuring that all parents can save for their children’s future in a simple and straightforward account.
“The launch of this new account means that we can still offer people a clear way of saving for their children, while we save the half billion pounds a year that we currently spend on CTFs.”
It is thought the accounts, which will be offered by private providers, will be in place by the end of next year - a deadline that has come under some criticism by the industry.
"The government is calling this new product a 'junior ISA' but in essence it appears to be a CTF without the contribution, which begs the question as to why the CTF is not kept but without the voucher," says John Reeve chief executive of Family Investments.
"Unfortunately, the timetable announced by the government means that there will be at least a six month gap between the end of the CTF and the junior ISA's introduction," he adds.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.