THE UK government is coming under renewed pressure to review its flagship child savings initiative, launched in a blaze of publicity just a year ago.
Junior individual savings accounts (Jisas) hit the market on 1 November, 2011, offering parents a new tax-free way of putting money aside for their children. The accounts were designed to replace child trust funds (CTFs), scrapped by the coalition government when it came into power.
But evidence suggests that the public appetite for Jisas remains distinctly muted.
Six million children qualify for the new accounts and 800,000 more become eligible for them each year. Just 72,000 junior Isas were opened in the first five months of availability, with some £116 million invested, according to HM Revenue & Customs. In contrast, more than 415,000 CTFs were sold in the same period following their January 2005 launch.
Jisas allow parents to invest up to £3,600 for each child each tax year, tax-free. Parents can take out either a stocks and shares Jisa, a cash Jisa or split the money between the two.
CTFs featured a government cash payment to parents to start the accounts, but there’s no government contribution to Jisas. That means they appeal primarily to those already inclined to save, according to Neil Lovatt, sales and marketing director at Scottish Friendly. “Junior ISAs are just a pale imitation of CTFs and have effectively turned it into a middle-class tax break,” he said.
Moneyfacts spokeswoman Sylvia Waycot said: “Jisas have not been the success that the government or providers will have hoped for, mainly because they only appeal to the wealthy who have cash to spare. In the current economic climate, most adults struggle to save for themselves let alone offspring.”
As in CTFs, the control of the money raised in Jisas passes to the child when they turn 16, although they can’t access it until they’re 18. At that point the account automatically becomes an adult Isa, but beneficiaries can do what they like with the money.
That absence of parental control is one of several factors deterring parents from opening Jisas. Almost half of parents and grandparents polled recently by F&C Investments said they were anxious about the automatic transfer of Jisas to the beneficiary at 18. Others include the absence of a starter cash incentive and the fact that parents with a CTF are, controversially, barred from opening Jisas.
An estimated five million children born between 2002 and 2011 are excluded from Jisas as a result – with many left stranded in CTFs that are no longer for sale and for which providers have no incentive to offer competitive terms.
Garry Mcluckie, marketing director at Alliance Trust Savings, said: “We believe the government could do more to encourage the take up of Junior Isas and we would urge them to revisit the rules around CTFs and allow these investments to be transferred across to Junior Isas to ensure a generation of children are not locked into defunct products that no provider is prepared to invest in.”
That restriction has put some providers off entering the Jisa market, limiting the choice of cash Jisas in particular. Kevin Mountford, head of banking at MoneySupermarket, said: “The launch of junior Isas 12 months ago was a damp squib as only a handful of providers launched junior cash Isa products.”
Taxpayer-backed Royal Bank of Scotland is among the high street names not offering customers a junior cash Isa, along with Santander, HSBC and Barclays.
So what is available for those looking to use cash Jisas to save for their children or grandchildren?
The best buy table is headed by the eyecatching 6 per cent rate offered by Halifax. It’s not available through Bank of Scotland branches, however, to the ire of many parents north of the Border.
Below that the highest rate is the 3.25 per cent deal from Nationwide Building Society, followed by a series of Jisas paying around 2.5 to 3 per cent, including one from Scottish Building Society.
Jisas aren’t the only form of cash accounts for children. The top two easy access accounts for children pay 4 and 5 per cent respectively, with several others paying 3 per cent or more.
Interest is paid gross on money deposited in conventional children’s accounts, as long as the child has been registered as a non-taxpayer (through HMRC form R85).
That means conventional savings can be just as tax-effective as Jisas, although parents making the savings may be liable to tax if the interest and income from the account exceeds £100 a year.
Cash savings aren’t necessarily the best port of call for child savings, however, particularly if you’re investing over an 18-year time frame. While there’s a greater risk of losses, the returns are likely to far outstrip those from cash over the long term, with volatility smoothed out over time.
If you were to save £3,000 a year into a junior stocks and shares Isa for 18 years, you’d end up with a tax-free sum of nearly £96,000, assuming net growth of 6 per cent.
High street banks, building societies, friendly societies, asset managers and investment companies all offer equity-based child savings options. There are some 50 stocks and shares Jisas on the market. The Jisa is merely the tax “wrapper”, however, so the range of fund types and charges within them can vary. Financial advice is recommended when investing in stock market based vehicles; find an IFA at www.unbiased.co.uk.
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