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Parent trap

25 February 2016

Many children’s savings plans look set to make slow progress as two thirds of Junior ISAs are stuck in low-interest cash accounts.

Introduced in 2011, the Junior ISA was hailed as a significant improvement on its predecessor, the Child Trust Fund (CTF). But despite the scheme’s success to date, many parents and grandparents saving on behalf of children are still failing to make the most of the opportunity to put long-term, tax-efficient plans in place.

Over six million British children born between 1 September 2002 and 2 January 2011 had a (CTF) automatically set up for them, with a £250 voucher from the government to encourage parents and grandparents to start building a nest egg. Nearly £5 billion was saved into these accounts before they were scrapped and replaced by the Junior ISA¹.

In comparison to their newer equivalent, however, CTFs never really caught on. They were offered by far fewer providers and were generally poor value. Thankfully, since 6 April last year, parents have been able to transfer CTF funds into a Junior ISA to benefit from better investment choices and greater flexibility. Importantly, that flexibility includes greater control over the distribution of funds when the child reaches 18 years of age.

Yet despite the process for switching being straightforward, and similar to transferring an ISA to another provider, many parents still haven’t done so.

Lacking interest

However, a Junior ISA wrapper offers no greater chance of investment success if the funds remain trapped in low-yielding cash accounts. A total of £582 million was subscribed to Junior ISA accounts in 2014/15, but around two thirds of this was deposited in cash1. Some parents will perceive cash as the ‘risk-free’ option even though, as latest figures from the Bank of England 2 confirm, interest rates on savings accounts have plumbed new depths. Of the total £1.65 billion saved in Junior ISAs, £1.1 billion is deposited in cash, and that caution may cost those children further down the line.

The reality is that saving to help provide for a child’s future is something that can be done with a true longer-term perspective. Parents and grandparents should instead be considering alternative strategies, such as investing in stocks and shares, which can realise the full potential of Junior ISAs and increase the scope to create tax-efficient capital to help meet the financial challenges children will face in later life. A period of potentially 18 years plus allows time to balance out the peaks and troughs of investing in riskier assets.

Debt relief

According to the Institute for Fiscal Studies, students will graduate with an average of £44,035 in student debt 3. While many parents will feel compelled to help their children pay back loans, putting something away during their children’s formative years could help prevent the next generation from falling back on the Bank of Mum and Dad once they have graduated.

It could also go a long way to giving them a much-needed leg-up on the housing ladder. The latest research by Halifax suggests that the average deposit for a first-time buyer has risen to just under £33,0004.

A Junior ISA can only be set up by someone with parental responsibility for the child, although it can be funded by multiple contributors, offering a flexible intergenerational planning option. Up to £4,080 can be contributed to a Junior ISA each tax year.

Once the child reaches 18, the Junior ISA will be rolled over into a standard ISA, after which time the child can withdraw the money if they wish. Alternatively, many parents will hope that a Junior ISA teaches the child the value of saving, and that they choose to make additional contributions to the ISA in future.

With the tax year drawing to a close, those looking to help children get a head start need to act soon to make the most of this year’s Junior ISA opportunity.

HMRC, August 2015

2 Bank of England, January 2016

3 Institute for Fiscal Studies, April 2014

4 Halifax, January 2016

 

The value of a Junior ISA with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than was invested. An investment in a Stocks & Shares Junior ISA will not provide the same security of capital associated with a Cash Junior ISA. The favourable tax treatment of Junior ISAs may not be maintained in the future and is subject to changes in legislation.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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