UK to introduce junior ISAs in November

The proposal to introduce a Junior ISA in the UK has been widely welcomed and investment firms say they will be offered at the launch date on November 01.

Introducing a default savings product available to the six million youngsters aged 18 or under who do not have a Child Trust Fund (CTF) is an important step to developing a savings culture in Britain and providing every young person with a financial asset, according to John Reeve, chief executive at Family Investments.

‘By the time the Junior ISA launches in November, 700,000 children will have been born in Britain. Today's announcement will increase the likelihood of every child having a financial asset when they turn eighteen,’ he said.

While the new product is an ISA in name, it has more in common with its predecessor the CTF. The Junior ISA allows parents, grandparents and anyone interested in a child's future to make deposits over an eighteen year period which cannot be withdrawn. Parents value the protection that a product like this offers as there is no temptation to dip into these funds.

‘The tax efficiency is an important incentive for parents, as anyone looking to set up a savings account for their child in recent months has faced difficult decisions on where to start. The £3,000 limit is a welcome extension on the current CTF limit but our experience indicates that the average family is only able to make modest contributions of around £20 to £30 a month which is well below the limit,’ explained Reeve.

‘As a result, the most important feature of the product is its universal availability and its simplicity. It is for this reason that we are pleased to hear that the Junior ISA will not require complex form filling when opening the product,’ he added.

Family Investments expects to offer a Junior ISA as soon as the scheme is launched. This is likely to be a stocks and shares option with a minimum regular premium of as low as £10 which will make it a savings vehicle open to all families.

‘Children's savings should be thought of in the same terms as a pension, as a long-term savings commitment that is likely to benefit from exposure to the stock market, particularly in the current low interest rate environment. Those people with children who already have a Child Trust Fund should continue to pay into these,' added Reeve.

Peter Feasey, head of J.P. Morgan Wealth Manager, said the proposed JISA will provide a tax efficient way of saving for children and will sit neatly alongside the other existing investment options, namely designating investment accounts for children or saving for retirement through SIPPs for Minors.

According to Fidelity International a parent who saves the full allowance each year could achieve a pot of almost £108,000 by the time the child is 18 (based on growth of 5% per annum) and Junior ISAs provide the perfect opportunity to teach younger generations about the benefits of saving.

Fidelity has calculated someone going to university in London in 18 years time could need £73,363 to cover their living costs and tuition fees for three years.  However, by saving regular amounts from an early age, this figure may not be as out of reach as many may believe.

By saving £132.50 per month, it is possible to achieve a pot of just over £46,000, based on 5% growth per annum, enough to cover their living costs for three years.  If they are able boost those monthly savings to £209.50, they could then achieve a savings pot of £73,462 to cover living expenses and tuition fees.

‘Young people often have the greatest opportunity to benefit from the long term performance of stock markets and the Junior ISA will allow them to do so in a tax efficient way, while also learning about the benefits of saving,’ said Tom Stevenson, investment director at Fidelity International.

But he added that the Junior ISA is not a replacement for creating a sensible joined-up system of adult saving. ‘That is to say one where people can move their money more freely from short term ISA savings to longer term pension pots. But, along with steps like the abolishment of compulsory annuitisation of pensions, it is an important move in the right direction,’ he said.