Why doesn't anyone want a Junior ISA?
According to sales figures from HMRC, only 72,000 Junior ISAs (or JISAs) were opened in the first five months since launch. This is despite there being six million eligible child applicants. Given that nearly half the adult population use an ISA, why does the junior version have such little support?
A JISA is just like a normal adult ISA in that you can save cash or invest in stocks and shares up to a fixed allowance (currently £3,600) tax-free each year.
This savings vehicle was introduced in November 2011 and replaced Child Trust Funds, which were costing the Government millions to sustain.
The CTFs were designed by the previous Labour Government to act as an incentive to get parents saving for their children's futures. Every child born between September 2002 and January 2011 was given a £250 voucher (£500 if from a lower income household) and another £250 voucher on their seventh birthday to encourage a positive savings culture.
Parents had to either open an account using the Child Trust Fund products available or if left the money was automatically invested on the child's behalf by the Government.
Using the comparable introductory period for the CTF scheme between September 2002 and April 2003, 394,532 Child Trust Fund vouchers were issued. 291,239 accounts were opened by parents and the remaining 99,514 was invested by HMRC.
Cleary there was an appetite for children savings accounts. So why has a fresh hunger failed to develop with the new scheme?
Moving money from Child Trust Funds
One of the biggest challenges the JISA scheme has is the bizarre rule that you're not able to open a Junior ISA if your child already has or is eligible for a Child Trust Fund. So if your child has a Child Trust Fund, you can't move that money over to a JISA. Essentially the money is stuck in a zombie account.
This seems silly as Child Trust Funds and JISAs are essentially the same thing (tax-free savings), just without a cash incentive.
Despite this, there are still millions of youngsters that are eligible for JISAs. So what's stopping them?
The onus is now entirely on the parents and families to start saving for their children. There is no intervention from the Government and some parents may have forgotten.
Because there is no cash bonus courtesy of the Treasury, there is perhaps no incentive to start a savings account quickly. There is no immediate gain to locking money away for 18 years, so other money priorities may be taking precedence.
Children can already earn tax free
Children can earn up to £100 of interest on savings tax free each tax year. So some will argue there is no need for an ISA and other accounts are more flexible.
However, if you keep savings invested eventually this threshold may be reached and earnings over £100 will be taxed at the rates that apply to you.
No money to save
Some industry figures think the slow uptake is unsurprising given the current economic climate. Most families with a bit of extra cash to put away may be looking at short term, flexible savings alternatives or using every spare penny to pay off bills and debts.
An 18-year bond
As soon as you start a JISA the money is locked away until your child turns 18. Child savings that can only be accessed up to 18 years later may not be an attractive prospect. Other child savings account products perhaps seem more ideal as they are more flexible, but the rates are generally not as good.
Open a Junior ISA if you can
Whatever the reason for the slow uptake of Junior ISAs, those who can should look to take one out.
There is real legislation blocking an estimated six million children from getting access to this new savings vehicle. But there are approximately six million others, and nearly 800,000 year on year that could benefit by having anything up to £3,600 invested tax free annually.
It doesn't have to be a lump sum, every little helps.
Let's take a look at the best products on offer for cash JISAs.
Top Cash JISAs
If you were to choose the Halifax Junior ISA paying the top rate of 6.0% and deposit the maximum £3,600 allowance each year for 18 years your child would have a tidy sum of around £114,000 waiting to be collected on their 18th birthday.
Whatever cynics might say, that's an enviable start in life and could help pay for studying or buying a home.
However, in order to access this great rate from Halifax, you as the registered keeper of the account would also need to have a Halifax adult ISA, holding your own savings to ransom.
The next best deal comes from Nationwide and Coventry Building Society which both offer 3.25%. Given the same calculation as before, this would still provide a very respectable nest egg of around £88,000.
Stocks and Shares JISAs
Over longer periods investing in the stock market tends to yield greater returns than investing in cash. That's why Stocks and Shares Junior ISAs may offer a better return than cash Junior ISAs.
However, the promise of greater rewards also comes with the threat of an increased level of risk. Because the money is invested in a combination of stocks and shares the value can go up as well as down, which means your child may get back less than what you put in.
On top of that worry you also need to factor in the charges to cover the cost of administering and managing the investments which will eat into any returns the portfolio makes over the years.
Splitting the £3,600 allowance between a cash JISA and a Stocks and Shares JISA could cover all bases.
Picking an account can be tricky as it is not as simple as choosing the best rates like with a cash ISA. Shopping around will help you find a good deal, while checking historic return rates should also help. Just remember that a solid performance in the past is no guarantee of similar success in the future.
What do you think?
Should more parents be taking advantage of this JISAs?
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