Junior ISAs: Tax Free Saving For Your Child's Future

The Momentum UK Team 01 November 2011

With the closure of the Child Trust Fund scheme earlier this year, many parents will be relieved to hear of the introduction of a new tax free way to save for their children's future.

As of the today (1st of November 2011), any child residing in the UK who is under 18 and does not have a Child Trust Fund will be eligible for a new tax exempt Junior Individual Savings Account (ISA).

Junior ISAs are effectively a tax free method of saving and investing for your child, and any returns on a Junior ISA will not count towards a child's tax allowance.

One of the major benefits of a Junior ISA is that parents, grandparents, friends and relatives will all be able to contribute, with those contributions protected from the taxman. Any money put into a Junior ISA on behalf of a child will remain safely locked away until the child reaches the age of 18, although the child may take control of the ISA once he or she reaches 16.

The current annual limit of the amount that can be paid into a Junior ISA is set at at £3600.00. This amount can be invested in a junior cash ISA, a junior stocks and shares ISA, or in a combination of both. There may be a number of investment options available, even including options such as ethical investment.

Just as with adult ISAs, Junior ISAs will come with a certain amount of risk to any capital you invest. For this reason it could be a good idea to spread any investments that you do make on behalf of your child.

Providers will be free to set their own minimum initial deposits, or payment rates, but these are likely to amount to less and be more flexible than similar rules for adult ISAs. Once the child reaches 18 he or she can either withdraw the fund or roll it over into an adult ISA tax free.

The Child Trust Fund scheme which provided similar benefits to the Junior ISA ceased taking new members as of 2nd of January 2011, meaning that any child born after that date was no longer eligible to join. One of the key differences between a Child Trust Fund and the new Junior ISAs is that a Junior ISA will not enjoy any government contributions, and some argue that this will leaves a lack of incentive to open a Junior ISA.

The bad news for those who already hold a Child Trust Fund is that it is not yet possible to transfer to one of a new Junior ISA, which will mean that they will not have the option of enjoying potentially better rates or other benefits.

Initially Junior ISAs may only be offered by a few providers, but are soon likely to become widely available from a number of stock brokers, banks and building societies.