Is it important to save for your children?
Junior ISA celebrates its first birthday this month. Most parents with children under 18 say it’s important to save on behalf of their children but the majority are still not aware of the savings potential offered.
The Junior ISA is a simple tax free savings and investment account very similar to an adult ISA (Individual Savings Account) just a mini version of one, which allows parents, grandparents and family friends to invest in cash and stocks & shares but on behalf of their children. Launched in November 2011 the Junior ISA was a replacement for the Child Trust Fund (CTF). Approximately 6 million children are automatically eligible for a Junior ISA, those that were born before 1st September 2002 and after 2nd January 2011, but recent figures show that less than 32% of families with an annual income than £28,000 had heard of Junior ISA’s, and 65% of all families wanted more detailed information on them*1.
For many parents saving can be a daunting prospect; there are many options and considerations to be made, and often it is tough to choose what they would consider to be the right option.
In the case of the Junior ISA, this is made more daunting perhaps, by the fact that saving in this manner is very often a long-term commitment, meaning that those parents choosing to invest in a Junior ISA don’t want to make the wrong choice.
Who can have a Junior ISA?
This is a question that is constantly asked, and there are a few simple factors that determine whether a child will be eligible. They must:
• Be a resident of the UK
• Be under the age of 18
• NOT be eligible for a Child Trust Fund (any child born between 1st September 2002 and 1st January 2011 will have been issued with a Child Trust Fund automatically)
If they meet these straightforward requirements, then great!
Where to start when thinking about a Junior ISA
Before taking out a plan many people begin to ask themselves ‘can I actually afford this’? One of the most attractive features about saving with a Junior ISA is the fact that the premium (the amount a parent can pay in to the Junior ISA) is hugely flexible and affordable. In fact premiums can start from as little as £10 per month and lump sum deposits are available from just £1 at a time in some cases. Parent can choose how much to save, all the way up to the maximum of £3,600 each financial year!
This means that, even in this tough economic climate, a Junior ISA is a very accessible method of saving. And if at any time your circumstances change such as your monthly budget expands, or shrinks, you simply contact your provider to change your premium amount. Simple.
The options – Cash? Or Stocks and Shares?
There are two options available to parents when choosing a Junior ISA:
Stocks and Shares
Money goes exactly where it says on the tin. It will be invested by the plan provider into their chosen stocks and shares, and will earn interest based on the success of the industries their money is invested in. This may sound complicated, but everything is taken care of with no hassle at all.
There are a couple of things though to consider with stocks and shares. The aim is to earn more interest on your money than cash, and research has revealed that for every 18 year period within the last 50 years prior to 2012, savings in stocks and shares have outperformed those in cash*2. However on the flip side, parents must also consider that the value of their fund does depend directly on the performance of the stocks and shares, and should this drop enough, they may actually end up getting less back than they’ve have put in.
This is considered the ‘safer’ option by most. The idea behind a cash Junior ISA is very simple – parent simply deposit their money and it will earn a guaranteed fixed interest rate, the amount of which will depend on the provider they choose. With this type of ISA you have the guarantee that you will definitely get an increase on the money you have put in, although the potential increase is less than that of stocks and shares.
Junior ISA – A whole Family Commitment
One of the great things about Junior ISA’s is how they allow anyone who wishes to contribute. This means that should grandparents, siblings or close friends that want to put money towards the fund, they are welcome to do so, making it a great way for them to contribute on birthday’s or special occasions. And the fact that direct debit doesn’t have to be set up (you can pay in just lump sums if and when it pleases you) means that this is hardly a taxing commitment, which brings us onto the next point.......
The Tax Umbrella
The final point to make, and this really is an important one, is that Junior ISA’s do not pay any tax, at all, on the growth of the fund or the final lump sum the child will receive at the end of the plan. Basically the child’s money is under an umbrella, sheltered from the tax man who cannot touch it. This obviously means it is a very effective method of saving.
Getting a Junior ISA
There are plenty of options available for you to look at once you have decided on whether you would like a cash or a stocks and shares Junior ISA.
One great option is http://www.financialadvice.co.uk/
• Tax Year: A tax year isn’t the same as a calendar year. A tax year runs from 6th April to 5th April the following year.
• Premium: A premium is the monthly fee that is paid
• Lump Sum: A single payment made at a particular time, as opposed to a number of smaller payments or instalments.
• Plan Provider: Can be a company that creates and sells the plan you select. A provider can be dependent on the product you’re buying, for example a mutual fund company, an insurance company, a brokerage firm services company or another financial services provider.
*1: Source: BBC News, November 2012
*2: Source: Barclay’s Equity Gilt Study 2011