Child ISA – ISA For Children
Looking to the future
One of the problems that has emerged in stark relief since the banking crisis of 2008 has been the level of indebtedness of British households and a culture in sections of the population that has abandoned traditional attitudes to saving.
Too many of us are unprepared to wait to make a purchase and will resort to using credit, which often ends up spiraling out of control.
In the long term, this “buy it now” mentality is unsustainable for society as a whole, and as a consequence the government has looked at the ways it can encourage more sensible financial planning. This will evince itself in a number of schemes, some more dramatic than others.
The coming compulsory occupational pension scheme roll out, for example, will no doubt come as a shock to many, but not every initiative is quite as draconian. Another looks to develop a “saving habit” in the population by incentivising parents to save for their children and to initiate sea change in how the young learn about finance.
This philosophy is not a new one and can be dated back to at least 2002 (more on that later). As there have been a number of changes to the approach used over the years, it is worthwhile outlining a few of the basic details involved.
The Child ISA: New beginnings
There are many ways that parents strive to provide for their children, whether that be teaching them how to cook, helping them with a difficult piece of homework or taking them round a museum in an effort to stimulate an appreciation for culture and history. Another that the government is keen on is for parents, family members and friends to contribute to is a Junior ISA (Individual Savings Account).
In tough economic times, the burden of carefully building a financial nest egg can be an enormous challenge on top of all the other costs associated with raising children, but there are a number of reasons why doing so will prove worthwhile in the long run.
The tax free value that a mature Child ISA accumulates could be used to pursue a range of options. University, once provided by government, is now enormously expensive, but in the modern knowledge economy higher education is still seen as a worthwhile investment.
The current generation of young adults face huge challenges in saving a deposit to get onto the property ladder, of paying exorbitant car insurance and, eventually, starting a family of their own.
Compound interest (where the interest received for an investment feeds off the added value of prior interest payments) is an incredibly powerful tool for counteracting the capricious winds of fortune. With the benefit of early investment, gains can start to accumulate at an ever-faster rate so that by the time a child reaches adulthood there could be a good sized nest egg available for them.
Predicting the future is, to some extent, always a foolish game, but regardless of whether we still need driving lessons or our cars have become autonomous, it is fair to say that there will always be a value to saving for a rainy day and being prudent. Taking out a Child ISA today could potentially reap financial dividends in the future for your offspring.
Child ISA Requirements
Junior ISAs are available to children who are:
- Under 18 years old
- Living in the UK
- Didn’t take up a Child Trust Fund account (CTF, see further down the page)
Like a normal ISA, there are two kinds, cash and equities (stocks and shares). In both cases your child will pay no tax on any income or capital growth. You may opt for either 1 or both kinds of ISA.
Junior ISAs can only be opened by a parent or guardian of children under 16. When you have decided upon whether to invest in one or two ISAs, you then need to select an account provider and get the relevant application form. A wide range of institutions, from banks to independent stockbrokers offer these instruments.
Additionally, children who are 16 or 17 can open their own Junior ISAs.
There are no restrictions as to who pays money into a Junior ISA, but the total annual figure is capped at £3,720 (This has now been increased to £4000 from the 1st July 2014). This is the total amount permitted in one year, regardless of whether of whether a child has one or two Junior ISAs in their name. Money can be transferred between Junior ISAs, but not from or to a normal ISA or a CTF. Even if the child moves abroad, cash can still be added to their Junior ISA.
The keys to the kingdom
One of the important aspects of Children’s ISAs is that no money can be withdrawn from the account until the child reaches 18, when the child will be able to access the full amount. The money in the account legally belongs to the child.
Part of the reasoning for this is to prevent the money being withdrawn by other relatives for their own purposes and to ensure that the child is presented with the sum at the end of compulsory full time education.
Whilst ownership is the child’s, the account is managed by a “registered contact”, who is the parent or guardian. This individual is the only person who can make decisions over the nature of the account; whether to change from cash to stocks and shares, to opt for a different provider or to report a change in details, such as to update an address.
The registered contact therefore plays an important role in the stewardship of the money, and for better or for worse their decisions will shape the profile of the investment. Parents might want to consider involving their child in the management of the fund as an introductory lesson in the mechanisms of finance in the event that they show any signs of curiosity. The regulations have made provision for this to the extent that children aged 16 or 17 can become the registered contact in their parent or guardian’s stead.
Additionally, there is actually a small loophole available where 16-17 year olds can also save an extra £5,560 in a cash ISA on top of their Junior ISA, a provision not available to anyone else. This means that they can potentially save almost £10,000 in each year before they turn 18.
If in the event that when the account holder reaches 18 they have no need to access the funds contained therein, the Junior ISA automatically becomes a standard ISA when the child reaches maturity.
The only circumstance whereby the money in a Junior ISA can be withdrawn before the child has reached their 18th birthday is when the child is terminally ill. HMRC state:
“Terminally ill means that the child has a disease or illness that is going to get worse and isn’t expected to live more than 6 months.” (source: https://www.gov.uk/junior-individual-savings-accounts/if-your-child-is-terminally-ill-or-dies)
In the event that this is the case, the registered contact needs to fill in a terminal illness early access form and submit this to HMRC for approval. In the case of death, the funds in any Junior ISAs will be paid to the inheritor of their estate.
Which is the Best ISA For Children?
As with most financial decisions, there is no definitive answer as to which type of ISA is right for a child, the choice rests upon an individual’s appetite for risk.
As with any such decision, doing your own research will usually pay dividends (click here to visit the site of the UK’s statutory body for finance and public awareness where you will find reams of useful information).
Stocks and Shares ISAs for Children are based upon the performance of the stock market and are thus more volatile than cash. What’s more, unlike a cash ISA, stocks and shares can lose money.
There are two caveats to this, however. The first is that at a time when interest rates are very low, the value of cash ISAs are seriously undermined by inflation eating into their real-world purchasing power. Secondly, historically speaking, investing in the stock market has tended to outperform other forms of investment when averaged out over the long term.
Which option you choose depends on a number of factors. The first is the time frame that the investment is being made over. If your child is nearing adulthood, then you may decide it is a safer option to go for a cash ISA, as over the short-term the stock market can fluctuate enormously. If the investment is taking place early in a child’s life then you may decide it is more efficient to choose an equity ISA.
Other factors to bear in mind include fund management charges, the rate of inflation and the mood of the market generally.
For the vast majority of investors, whether they take an active or passive approach to managing their financial affairs, consulting with an independent financial advisor is highly recommended.
Once upon a time consumers had little opportunity to make sure that their money was invested in financial instruments that were true to their values. Many funds comprised of shares in companies which made profits in industries that some viewed as exploitative or immoral. Perhaps most recently, many environmentally concerned investors were horrified to discover their stake in BP during the Deepwater Horizon disaster in the Gulf of Mexico.
Thankfully this is no longer the case. There are a number of investment vehicles that cater to ethical or religious requirements, whether they been green stock portfolios or Sharia compliant Junior ISAs (such as that provided by Aberdeen Asset Management through The Children’s ISA Ltd).
It’s not the Wild West
Both kinds of ISA are protected under the Financial Services Compensation Scheme (FSCS). In the case of Junior Equity ISAs, the FSCS pays up to £50,000 per person, per institution. That is to say that even if a firm collapses, the scheme will protect any savings below the threshold. (source: http://www.fscs.org.uk/what-we-cover/eligibility-rules/compensation-limits/investment-limits/)
Child Trust Fund (CTF) accounts
Not every minor is eligible to open a Junior ISA, which are a comparably recent innovation. Their predecessor was an instrument called a Child Trust Fund (CTF) account.
In 2002 the previous government set up CTF accounts with the aim of encouraging parents or guardians to save for their children so that upon reaching adulthood they would already have a savings account.
Available to children born after the 1st of September 2002 and before 2nd of January 2011, one of the distinctive characteristics of the scheme was that the government paid a voucher to the child’s account of either £250 or £50 on inception, with another lump sum of the same amount paid following the child’s 7th birthday. This amount was doubled in the case of low income families.
Like Child ISAs, CTF accounts were tax free, exempt from capital gains tax and could only be accessed once the child reached adulthood.
Eligibility was determined by:
- That the child was resident in the UK
- That the parent or guardian was in receipt of Child Benefit for at least one day in the above period
- That there were no issues surrounding immigration restrictions or these had ceased to apply before April 2011
- If the child was looked after by the Local Authority they were also eligible
In many other respects, such as the maximum annual contribution, CTF accounts and Baby ISAs are the same. In 2010, the Chancellor of the Exchequer, George Osborne, announced the abolition of the fund as part of the government’s review of its finances, replacing them with the ISA for Children.
Transfer a CTF to a Junior ISA
The government announced plans that it may consider allowing children who hold a Child Trust Fund to transfer their investment into a Junior ISA from April 2015 but this has still yet to be confirmed.
As with any form of financial planning, the earlier you can begin the better. At a time when the economy appears to be strengthening and the troubles of the past few years are hopefully behind us, now is as good a time as any to start saving for your children’s future.
If the government’s attempts to inject more competition into the banking and financial sector as a whole are successful then new products with more attractive returns may start appearing in the near future.
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