Junior ISA launched today: A new way of saving for your Child’s Future.

From today, 1st November 2011, Junior ISAs have gone on sale and have replaced Child Trust Funds.  

What is a Junior ISA?

A Junior ISA is a tax-free savings account for children which can’t be encashed until they reach 18 years old, except for exceptional circumstances including terminal illness and death. It essentially allows family or friends to contribute to a child’s future. It is very much viewed as a savings vehicle for a child in preparation for University Fees or for first-time buyers of their home.

How much can be contributed annually?

The maximum annual contribution from friends or family is £3,600.

How does it differ from a Child Trust Fund?

Well, the Child Trust Fund annual contribution limit was £1,200, however, this will now increase to the Junior ISA limit (£3,600) later on this year.

However, the main difference is that the Junior ISA will not benefit from the government contributions that the CTF enjoys, but instead relies entirely on funding from parents, relatives and friends.

What are the potential benefits? Why save?

Based on a growth rate of 5% per year, providers are purporting that it could be possible for a Junior ISA fund to accumulate £100,000 by the time the child reaches age 18, the minimum age at which it can be encashed. This is a result of compound interest  “The most powerful force in the universe” (Albert Einstein)  From a financial planning perspective, it is certainly powerful and one of the fundamental reasons why people should be saving as early as possible. It’s the perfect way to make money from money.

What happens when the child turns 18?

Once the child turns 18, the Junior ISA is automatically transferred into an adult ISA in the child’s name. However, from as early as the age of 16, the child can take control of the investment although it won’t be able to be enchashed until 18.

What are the disadvantages?

Whilst the Junior ISA is available to UK residents under the age of 18, it is not available to those children who already have a Child Trust Fund. This essentially excludes children born between 1st September 2002 and 2nd January 2011, which is 9 years. Money saved in a CTF can’t currently be transferred into a Junior ISA. However, it is not known at this point whether the rules will be relaxed.