Plans for a new Junior ISA savings account for children in UK announced

News - Savings

Written by Ray Clancy

Thursday, 28 October 2010 10:30

Plans for the introduction of a new tax free savings account for children in the UK from the autumn of 2011 has been widely welcomed by the financial services industry.

It comes after the government earlier this year decided to scrap Child Trust Funds (CTFs) which it paid into to encourage parents to save for their children’s’ future.

Financial Secretary to the Treasury, Mark Hoban, said that all returns will be tax free, funds placed in the account will be owned by the child and would be locked in until the child reaches adulthood. He also confirmed that investments will be available in cash or stocks and shares, annual contributions will be capped and there will be no government contributions into the account.

‘I am committed to ensuring that all parents can save for their children's future in a simple and straightforward account. The introduction of this new account means that we can still offer people a clear way of saving for their children, while saving the half billion pounds a year that we currently spend on Child Trust Funds,’ said Hoban.

‘The Government will now work closely with stakeholders to finalise the structure of the accounts, and intends for the new accounts to be available by autumn 2011,’ he added.

‘Launching a Junior ISA is a good move. Not only will it help to teach children the importance of saving from an early age, and encourage parents and other family members to put money away for their children, but the fact that it is an ISA means they will already be familiar with the concept of ISA investment when they go on to have a standard ISA of their own,’ said George Ladds, head of investments and pensions research at Fair Investment Company.

‘The extension of the ISA regime to children, particularly if stripped of some of the restriction of CTFs such as the obligation to offer a Stakeholder option and the low cap on annual contributions, would be highly welcome by parents and encourage strong participation by the financials services industry,’ said Jason Hollands, Head of Corporate Affairs at F&C Investments.

‘We believe there is room for a savings account for children, which has a wider scope for investment than a deposit account and that can be designed to encourage savings and educate children in the merits of other permitted asset classes beyond cash,’ said a spokesman for Brewin Dolphin, one of the largest independent investment managers for private investors.

Experts believe that it is appropriate to use the existing ISA mechanism as it is a concept that is well understood and respected and is offered by every high street bank and building society as well as more specialist providers.

‘If the familiar concept is retained the costs should also be lower and the marketing task easier. We approve of Stakeholder versions with more proscriptive rules and capped fees that can be offered to the mass market but we do believe it should not be compulsory for providers to offer stakeholder versions,’ added Brewin Dolphin.

It may, however only appeal to those parents who are willing to save for their children’s future, according to Michelle Slade, spokesperson for Moneyfacts. ‘The Junior ISA will be a welcomed addition to the market. While the Junior ISA goes some way to compensate for the loss of the child trust funds (CTF), it will not help those children from families who can’t afford to put money aside,’ she explained.

For those who use it the benefits are good. ‘By the time the child reaches 18, they could end up with a sizable tax free nest egg, which they should hopefully be able to transfer to an adult ISA. Hopefully providers will come on board with the scheme, bring a competitively priced market, which will benefit younger savers. Interest rates will have to be higher than standard children’s accounts to make it a worthwhile incentive,’ added Slade.

But James Budden, marketing director of Wealth Management at Baillie Gifford is more sceptical. ‘It appears the government has taken pity on those organisations whose business model depended on the CTF. As reported this proposal does not seem to offer much more to investors than is already available through investment trust saving schemes,’ he said.