Your eight-point guide to Junior ISAs

Junior ISAs replace Child Trust Funds from today (1 November). Maria Merricks offers a quick run-down of what advisers need to know.

1. What is it?

The Junior ISA (JISA) is the government’s latest initiative to help family members save for their child’s future.

Family and friends can contribute a maximum of £3,600 each year into a cash or a stocks and shares account, which the child can have one of each. From April 2013, the limit will be raised in line with the consumer price index.

As with the adult ISA, any capital gains and income will be granted tax freedom.

2. Who is eligible?

The JISA is available to all UK residents under the age of 18 apart from those with a Child Trust Fund (CTF) - which applies to all children born between 1 September 2002 and 2 January 2011.

3. When can they access it?

Except in cases of terminal illness or death, no withdrawals can be made before the child’s 18th birthday at which point it will automatically be converted into an adult ISA. However, the child can take control of the investment from age 16.

4. How does it differ from a Child Trust Fund?

The main difference between the two vehicles is that JISAs will not benefit from any of the government contributions a CTF did (£250 at birth and a further £250 on the child’s seventh birthday), relying solely on funding from parents and relatives.

The issue of the JISA’s £3,600 contribution limit compared to the CTF’s £1,200 has been addressed with a rise in the CTF limit to meet the JISA later this year.

5. What are the advantages?

The advantages are quite clear. At a time when university fees are at a record level and deposits for first time buyers are soaring, the opportunity to provide a nest egg is certainly appealing.

In fact, contributions of £100 each month from birth to the child’s 18th birthday would generate over £39,000, when considering an average growth rate of 6%, according to Chelsea Financial Services.

As with CTFs, the long term nature of investment into a stocks and shares JISA from birth increases the potential for some great returns. However, where one of the CTF’s greatest negatives was the lack of offerings (there are only 14 stocks and shares CTFs on the market) there is expected to be a much better choice of JISAs.

Adrian Lowcock, senior investment adviser at Bestinvest, says it is refreshing to see the successful ISA format being replicated across the industry but highlights the importance of shopping around.

“No doubt there will be some providers who offer free ‘toys’ to families when they open a Junior ISA but we encourage parents to look for the best value service for their children. I do not see why investing for a child should be treated any differently than when investing for an adult,” he says.

6. What are the disadvantages?

There do appear to be some teething problems, however. The main concern at the moment is that many platforms and providers are struggling to update their systems in time to offer JISAs from 1 November.

Another major issue for advisers is the fact existing CTFs cannot be integrated with a JISA. Philippa Gee, managing director of Philippa Gee Wealth Management, says the concept of the JISA is “spot on”, but it is this detail that brings it down.

“It rules out anyone between the age of nine months and nine years which will certainly dilute the interest and the impact the JISA will have,” she says.

Gee is concerned for those children with a CTF model as those providers are likely to lose the motivation to improve the offering, keep charges as low as possible and have a wide fund range.

“Allowing transfers from a CTF to a JISA would help solve this headache and it makes sense. The current position means those entitled to a JISA could end up with a cheaper, more attractive savings plan compared to those stuck with a CTF. Hardly fair,” she says.

7. Who will be offering JISAs?

As with the traditional adult product, most banks and building societies are ready to offer cash-based JISAs, while a number of fund houses such as Legal & General Investment Management and Fidelity have confirmed their stocks and shares propositions.

Other groups are launching JISAs from slightly different angles: for example, Ecclesiastical and Scottish Widows Investmet Partnership have ethical and Shariah-compliant offerings respectively.

8. What alternatives are available?

Children’s savings accounts: There are more than 60 accounts for families to choose from, many with attractive rates of interest. Halifax, for example, offers a Children’s Regular Saver Account, a one-year bond paying 6%.

Children’s products from National Savings and Investments: A variation on the children’s accounts above, NS&I offer the likes of Children’s Bonus Bonds – a five year tax free product on which the full interest rate is paid when the bond has been held for the full term.

Premium Bonds: The possibility of winning prizes from £25 to £1m has traditionally made these products a popular gift for children under 16. The bonds can be cashed in at face value at any time.