10 things you need to know about JISAs
Junior Individual Savings Accounts (JISAs) were launched on 1 November to replace the child trust funds (CTFs), but what are the benefits of taking one out, and do you actually need one?
1. What is a JISA?
The JISA offers parents a tax-free way of saving for their child. You can only hold one cash and one investment JISA at a time, but it’s possible to invest in a range of assets from cash to bonds and shares within these accounts. The tax benefits work exactly the same way as for adult ISAs.
So interest on cash JISAs is tax-free; similarly, you won’t pay tax on income paid out by investments in your JISA (although dividends on shares are still taxed within investment funds held in it), nor capital gains tax on the sale of investments within it.
2. What is the limit?
You can deposit up to £3,600 each year into a JISA, an increase from the £1,200 previously allowed in the CTF. Unlike adult ISAs, there are no rules on how the allowance can be split between cash and investments. The allowance will increase with inflation each year from 5 April 2013. The limit on existing CTFs will be raised to match the JISA on 1 November.
3. Who can get one?
JISAs are available to all children under 18 except those who currently hold a CTF. That means anyone under 18 born before September 2002, when CTFs were introduced, and babies born after the demise of CTFs on 3 January 2011.
For those born between January and the launch of the JISA there will be an additional backdated balance. Management of the account will pass to the child when they turn 16, but they can’t access the funds until they are 18.
4. JISAs VS CTF: what's changed?
The only real difference between a JISA and a CTF is the lack of contribution from the government. CTFs received a government payment of £250 to all children at birth (and £500 for low-income families), and a further payment at the age of seven.
However, Kate Moore, spokesperson for Family Investments, points out that for parents with an existing CTF it is worth remembering that a JISA is not necessarily a superior product. “Children with stakeholder CTF accounts can enjoy key benefits including a 1.5%
capped management charge, lifestyling to protect growth in the later years of the account and low minimum premiums from £10,” she adds.
The lifestyling element means your invested funds are automatically restructured, so money is gradually moved out of higher-risk assets into lower-risk alternatives as you get closer to your account maturing. JISAs won’t offer these user-friendly features.
5. How useful is it?
Not every child will benefit from the tax breaks, because most children’s investments don’t make enough to be taxed at all. Children have the same tax-free personal allowance as adults (£7,475 in 2011/12), which very few exceed.
6. Where does the JISA fall short?
At present, any child with a CTF cannot hold a JISA and it’s impossible to transfer funds from a CTF into a JISA. Many providers, including The Children’s ISA, are lobbying the government to change this. David Dawson, spokesperson for The Children’s ISA, says: “We would also like to see the government providing a contribution, as they did with CTF, as in these tough economic times it’s important children’s savings are taken seriously.”
7. Will there be lots to choose from?
Another potential failing of the JISA is that there are likely to be fewer products to choose from.
Because CTFs had a kick start with a payment from the government, lots of high street names offered them. Moore says parents may have more difficulty finding JISA providers and there is also a risk they won’t be taken up by that many parents.
Additionally, because the onus will be on parents to set up the JISA, there will be a savings gap within the next generation between those children who benefited from the government’s CTF contributions and those who didn’t.
8. Is a JISA better than paying into an adult ISA for my child?
As with a CTF, saving into a JISA means the child’s savings pot is ringfenced from both the child and the parents up to the child’s 18th birthday, at which point it becomes an adult ISA; but there’s nothing to stop the child withdrawing the lot and spending it at that point.
If you use your own ISA allowance to save for your child, the money remains under your control until you decide to hand it over. But this means you have to eat into your own ISA allowance for the year.
9. Will they be popular?
With house prices and university fees soaring, it is important children have a savings pot for the future. The JISA could deliver a tax-free payout of £105,000 at the age of 18, assuming the child’s parents invested the maximum £3,600 per year from birth and also assuming a 5% return per year. A smaller monthly contribution of £30, based on the same return, could grow to £10,600 over 18 years – quite a useful savings pot for an 18-year old.
The JISA is a long-term savings plan and therefore investing in stocks and shares is likely to provide a better return than cash over 18 years. But as with all investments, you have to be aware that it can rise as well as fall.
10. Who is offering them?
While several firms have already announced their investment JISAS, there is a real lack of commitment to cash JISAs. Most banks have adopted a ‘wait and see’ outlook. For example, Santander says it is “considering its JISA options”, while Lloyds says it is “working through the details of the accounts” just a few days before the JISA launch date. In fact, at the moment only Nationwide, Skipton and Bank of Cyprus have confirmed launches for cash JISAs.
Below is a list of all the providers offering stocks and shares JISAs so far:
AJ Bell - ajbell.co.uk
Chelsea Financial Services - chelseafs.co.uk
The Children's ISA - childrensisa.co.uk
The Children's Mutual - thechildrensmutual.co.uk
F&C - fandc.com
Family Investments - familyinvestments.co.uk
Fidelity - fidelity.co.uk
Foresters Friendly Society - forestersfriendlysociety.co.uk
Fundsmith - fundsmith.co.uk
Hargreaves Lansdown - hl.co.uk
JPMorgan - jpmorgan.com
Legal & General - legalandgeneral.com
Sheffield Mutual - sheffieldmutual.com
Shepherd's Friendly - shepherdsfriendly.co.uk
The Share Centre - share.com
Witan - witan.com
A feature of defined contribution pension funds. As people move closer to retirement, their tolerance to risk reduces. “Lifestyling” recognises this and provides an automatic switching facility from funds with higher volatility to ones with less volatility as retirement approaches. Generally this means the pension fund manager gradually moving a client from riskier assets such as shares into corporate bonds, gilts and cash as they near retirement.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
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.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.