The Junior Isa is celebrating its first birthday. Finance columnist Jeremy Gates looks at whether the replacement for the Child Trust Fund has been a hit or a miss
WITH the costs of a university degree surging and expensive gap year travels seen as the norm, it probably makes sense to start saving on behalf of children from the moment they are born.
That was possibly the thinking which led the coalition Government to launch Junior Isa (Jisa) saving accounts a year ago, on November 1, 2011.
They replaced the Child Trust Funds (CTFs), Gordon Brown’s masterplan to equalise the prospects and opportunities of young adults.
About six million children, born between September 1, 2002 and January 2, 2011, have CTFs, which can be held in cash, or stocks and shares.
But CTF accounts offer less choice and are more expensive to run than Jisas.
Unlike CTFs, which were automatically opened for all new born children with a voucher from the state (to be topped up by friends and relations over the next 18 years, if they wished) the Jisa is a voluntary scheme.
The individual fund, as with adult Isas, is invested in cash, stocks and shares or funds.
Although returns from these investments are tax-free, money cannot be accessed until the child turns 18 – and the new adult then becomes the legal owner of the account, so it converts into an adult Isa.
For grandparents and elderly relatives wary of being caught by inheritance tax, a Jisa appears to be a good way of steering money away from the taxman.
The Jisa limit for each child is £3,600 per annum, or up to £300 a month. If the current maximum amount is maintained and is saved in each tax year, from the year the child is born, when the child reaches 18 years old, there would be at least £64,800 in the pot. A return of 6% per annum could turn that into a lump sum of around £114,844.
“Sounds a lot, doesn’t it?’’ says Jason Hollands, a financial adviser at Bestinvest.
“But never forget that the average cost of a degree at a good university is estimated to be around £50,000 for those starting courses in 2012. Then kids have other costs to face as they enter adulthood, such as getting a deposit together for their first home.’’
Jisas are available to children born on or after January 3, 2011; to under-18s born on or before August 31, 2002, and to children born on or between September 1, 2002, and January 2, 2011, who didn't qualify for a CTF.
But figures from HM Revenue and Customs show Jisas made a slow start: only 72,000 were opened in the first five months of the new scheme
Only optimists, therefore, believe more than 100,000 Jisas were opened in year one. Providers may be partly to blame.
Mr Hollands says: “Following late clarifications of the rules, many providers were not up and running with Junior Isas at inception.’’
Other factors are important.
Family finances are under acute strain – and with bills soaring, few have the spare cash to envisage Jisas for possibly two or three children.
Secondly, the returns from many avenues of savings have been poor since the crash of 2008. Shares in London and on other markets worldwide have seen minimal growth, and many managed funds are marking time.
Cash may be a haven in turbulent times but returns on cash in many savings accounts are derisory.
Andrew Hagger, founder of Moneycomms.co.uk, says the best-paying Jisas currently include Nationwide Building Society (Smart Jisa) at 3.25% and Coventry Building Society, also 3.25%.
Halifax offers 6% in a cash Jisa when a parent or guardian also holds an adult Isa with Halifax.
But are 18-year-olds mature enough to handle a four-figure sum landing in their lap?
Mr Hollands says: “Many parents are nervous about their kids getting their hands on a big pot of money at 18. Perhaps these parents should consider using their own Isa allowances instead, if they want to keep control over when cash is handed over.’’
Kevin Mountford, head of banking at MoneySupermarket.com, says: “Junior Isas were launched 12 months ago but are only available to children who didn’t qualify for the previous Child Trust Fund scheme. Therefore it is no surprise that only a small number of accounts have been opened since launch, and the number of providers who have launched Jisas is small.
“However, the principle of Jisas is a good one; encouraging parents and grandparents to save on behalf of their children or grandchildren. With the increased cost of living and rises in university tuition fees, the earlier parents or grandparents begin saving, the better start they can give to their children.
“Unfortunately, however, we are not a generation of savers, and this needs to change. Rather than giving children presents for a special occasion, it may be more beneficial in the long term to put some money into a savings account.’’
Mr Mountford fears Jisas are being squeezed by rival savings products. A Chorley Building Society account pays 4.00% AER, plus a free piggy bank gift, while Newcastle Building Society offers 3.02% – neither are subject to Jisa rules.
“The introduction of CTFs changed the landscape of children’s savings somewhat, but we are beginning to see a culture shift back to old-school savings products from banks and building societies offering gifts and memorabilia as an incentive,’’ says Mr Mountford.
“This can only be seen as a good thing – if anything it can encourage children to start saving from an early age, then this may be more valuable than an extra per cent interest rate.
“NatWest, for example, recently announced the re-launch of the NatWest pigs, which will be offered to children when their parents open a children's savings account.
“Similarly, there are rucksacks and goody bags on offer from other providers in an attempt to incentivise savers.’’
Given that Jisas can grow over 18 years, of course, it makes sense to put money into equities – through managed funds rather than individual shares.
According to the Association of Investment Companies, which represents investment trusts, a sum of £3,600 invested 18 years ago would have grown to £13,012 by September 30, 2012.
Had £3,600 been invested annually over 18 years to September 30, a lump sum of £144,508 would await a lucky 18-year-old.
At Witan Investment Trust, marketing director James Frost says: “We are pleased with the level of interest in our Jump Junior Isa.
“The average value of investment into each account is much higher than expected, though the number of accounts is fewer than many anticipated, perhaps affected by prevailing uncertainty in financial markets.’’
When equities deliver bumpy returns, as we have seen since 2008, management expenses become more significant. Over 18 years, they have a big impact on lump sums paid on maturity.
Alliance Trust Savings, which requires minimum lump sums of only £50, makes a Jisa charge of £10 per quarter.
On the Bestinvest Jisa, there are no initial charges on funds, saving up to £198 on a £3,600 investment, and many funds are boosted by annual loyalty bonuses.
Financial adviser Hargreaves Lansdown runs a Vantage Jisa of stocks and shares which keeps a tight grip on charges.
There are also strong demands for Jisas and CTFs to be lumped together – to widen the choice for savers and to equalise benefits.
Mr Hollands says: “We urge the Government to revisit the rules around CTFs and allow these investments to be transferred to Jisas to ensure a generation of children are not locked into defunct products that no provider is prepared to invest in.’’
In year one, Jisas have delivered a wider choice than CTFs, and sterner competition between providers, which has lowered fees.
Mr Hagger says: “It makes no sense to run two separate tax-free savings schemes for children. The Government should revisit this situation and act to allow CTF account holders to switch to Jisas, where there is more choice and better rates available for cash-based products.’’
For further information: Bestinvest’s (0207 189 9999) free guide to Investing for Children is available at www.bestinvest.co.uk/junior; AIC factsheet on Saving for Children is available at 0800 707707 and www.theaic.co.uk; Hargreaves Lansdown: 0117 900 9000 and www.hl.co.uk