July 30, 2014

Investing for Children

Investing for Children through a Junior ISA is an ideal investment vehicle that allows parents help children to deal with future housing and education costs.

What is a Junior ISA

A Junior ISA should be thought of as an ”adult’ ISA but for children. They are simply designed for adults to save and invest on behalf of their children, replacing the Child Trust Fund. As a tax efficient savings vehicle, Junior ISA’s are a way of helping to develop future financial security for your children as they can only withdraw money from it when they turn 18. They will be available from November 1st 2011, and parents as well as family and friends can combine to contribute the maximum yearly allowance of £3,600 per child.

Why should I apply for a Junior ISA?

Life is getting more expensive, especially for the modern generation. The cost of University education is increasing, and saving the funds for a home deposit is becoming ever more difficult. But via a Junior ISA, you can help your child increase their chances of financial security due to the benefits of long-term compounding. Research from Fidelity International highlights the benefits of this:

Consider the full Junior ISA allowance was invested each year from birth until the age of 18 for your child with an assumed growth rate of 5%. Also factor in adjusted inflation rate of 2.5%, and this £3,600 invested each year could grow to become £101,336.52 hypothetically. That should be more than enough to see your child through University as well as enough remaining for a housing deposit to set your child free!

However, one must always remember the value of investments can fall as well as rise.

Who can take out a Junior ISA

Firstly, anyone child who has a Child Trust Fund is not eligible because they will essentially enjoy twice the tax savings. Having ruled that out, the next set of criteria is just as simple, for a Junior ISA, a child must either be born on or after January 3rd 2011, or born before September 2002 and under the age of 18.

What else should I be aware of?

No withdrawals can be made from a Junior ISA until the child reaches 18 (once 18, the Junior ISA becomes an Adult ISA). There are only extreme exceptions to this feature, for example terminal illness of the child. And unlike an Adult ISA, it will not be possible to take out a new Junior ISA with a new provider each tax year. All the money within a Junior ISA is kept with a single provider, although it is possible to transfer all the funds to another provider.

It will also be possible for children to hold one cash and one shares Junior ISA at a single time, splitting the £3,600 between them. So, you may decide to opt for the ‘safety’ of a cash ISA as well as the more risky option of investing in shares or funds within a Junior ISA. Moreover unlike CTF’s, there will be no government contributions.