The bank of mum and dad doesn’t necessarily close when your child reaches 18, nowadays university fees and mortgage deposits require savvy financial planning.
It now costs £143,000 to bring up a child until the age of 18, according to the Joseph Rowntree Foundation.
There is no doubt that the new Junior ISA has been brought in to fill the gap left by the old Child Trust Fund (CTF). They both perform the same function – providing an incentive for parents to save on behalf of their children; to build them a nest egg for their future. But how do the two investment vehicles compare and why has the CTF been replaced by its new-fangled successor? The first part of this article looks at the overlaps between the plans; part two addresses the differences in more detail.
Purpose
The new Junior ISA and the now closed CTF both share a common aim: to encourage parents and guardians to save money for their children so that when they reach adulthood the money awaiting them can be used to kick start the rest of their lives. By providing a tax exempt vehicle where the invested monies belong to the child, the idea is that the funds will be securely ring-fenced whilst given the best chance to grow successively as the child grows.
Term
In both cases, as suggested above, the money put into these plans is locked away until the child turns 18. No-one, neither the parent nor child can access it until that point with the only exceptions being in the event of extreme circumstances such as the death of the child or a terminal illness.
Tax
The Junior ISA and the Child Trust Fund share the same tax breaks in that they are not taxed on any income generated by assets within the plans, whether it be interest payments on cash deposits and bonds, or dividends on stocks and shares. If those assets grow significantly they will also avoid being subject to capital gains tax (CGT) as they would if they were held outside of an equivalent tax exempt savings vehicle.
Junior ISAs and CTFs aside, children are subject to the same income tax thresholds as adults where their income would only become taxed if it exceeded £7,475 in a given tax year. However, it is worth bearing in mind that other child savings accounts, for example, can still be subject to tax on income which exceeds £100 per year for any monies donated by an individual parent or stepparent (to prevent parents using these accounts for personal gain). Neither the CTF nor the Junior ISA have these £100 income caps.
In addition, an important consideration for parents or families on lower incomes is that when the times comes at which the child (then adult) can, if they wish, access the funds from these plans, the new influx of money won’t affect the calculation of any benefits that they may be receiving.
Subscriptions/Contributions
Although the CTF previously had a contribution limit of £1,200 per year it has now been raised to match the subscription limit of Junior ISAs. The increase dating from the point at which the ISAs were launched on 1 November 2011 means that each type of plan will now permit up to £3,600 to be contributed (subscribed) each tax year.
Management
The CTF and the Junior ISA must be run/managed by a single registered contact who will usually need to be either a parent or guardian. This person will then be responsible for making all decisions about how and where the funds in the plans are invested. In the case of the CTF, a voucher which entitles the child to an initial government donation (usually £250) is sent to a parent at the outset and this person is then responsible for setting up the account using the voucher. Similarly the registered contact for a Junior ISA will be the parent/guardian who opens the child’s first ISA. The registered contact in both cases will be responsible for the account until the child turns 16 when for the CTF they will and for the Junior ISA they can, if they wish, take over the running themselves for the remaining two years. The plans and the money therein, however, are always the property of the child even before they turn 16 and cannot be accessed by the registered contact at any stage.
As you can see there are a number of significant similarities behind how the CTF and the new Junior ISA are run and why they exist as savings options for parents and children in the first place. So all this does beg the question as to how the new Junior ISA is different to its predecessor and why the original CTF was scrapped in favour of the new investment vehicle. For more information on this see part two of this article: The New Junior ISA vs The Old Child Trust Fund – The Differences.
© Stuart Mitchell 2012
Having discussed the features that the old Child Trust Fund (CTF) and the new Junior ISA had in common in the first part of this article (The New Junior ISA vs The Old Child Trust Fund – Overlap) the following highlights some of the ways in which they differ an why the Junior ISA has been brought in place of the CTF.
Availability
The most obvious discrepancy between the two plans is that the CTF is now closed to newborns, in fact any child born after 2 Jan 2011. As discussed in the first part of this article, children born between 1 September 2002 and 2 January 2011 will have been issued with a voucher which will have either been used by parents to open a CTF account or will have expired, in which case the HMRC will have automatically opened an account on the child’s behalf.
The Junior ISA, however, can be opened for any child born either side of the CTF’s active dates above. Thus, children born before the CTF was launched in 2002 can still have a Junior ISA opened for them whilst newborns since January 2011 are also eligible.
State Contributions
The most popular feature of the old CTFs is that, for most children, the government would have issued a voucher worth £250 to get the plan going. This initial kick start varied if the child was in a low income family, in which case they could receive up to £500, or if the child received its first child benefit payment after 3 August 2010 – when they were then only entitled to a donation of £50 as the government began to scale back its contribution. What’s more, the CTF also promised a second state contribution of £250 when the child turned seven, if that event occurred before 1 August 2010.
Unfortunately, the new Junior ISA comes with no such welcome, or the extra boost at the age of seven, which explains why parents have been more lukewarm about their arrival in the place of the more generous CTFs.
Investment Choices
The CTF, broadly speaking, came in three different guises which offered certain investment choices based upon the risk that the parent (registered contact) wanted to take on in search of higher returns on the investment. Essentially, as with most investment, the higher the potential returns, the high the risk encountered.
The default account, that treads the middle ground, is a Stakeholder Account, which was what children ended up with if the voucher expired before the parent managed to open an account for them. These accounts invest the funds into shares and bonds but are required by government rules to spread the risk across multiple companies rather than put proverbial eggs into single baskets. What’s more the providers of such accounts are required to switch the funds to low risk investments once the child turns 13 to safeguard the plan as the child approaches 18.
The most secure CTF option is a Savings Account which simply invests the funds as cash and therefore protects the capital of the investment whilst only providing limited returns in the form of the interest accrued on that capital. The riskiest option with the highest potential returns, is the Share Account which, akin to the Stakeholder Accounts, invest the money into stocks and shares but unlike such accounts, don’t have the government required safeguards. Therefore there is a higher level of risk involved although the length of the terms involved (18 years) should increase the chances of any losses being counterbalanced by gains in the long run.
Junior ISAs on the other hand, can consist of a cash element and/or a stocks and shares element, just as their adult counterparts do. As little or as much of the subscriptions can be put into each as the parent/child wishes. The variety between individual plans will result from the distinct offerings of each ISA provider, such as varying discounts in investment charges and access to different ranges of investments. In principle, the parent/child can manage what their plan invests into although some providers may link their plans to specific funds, like investment trusts, for which the fund manager will decide how the underlying investments are to be managed.
Options at Maturity
The Junior ISA further differs from the CTF in terms of what happens to it when it reaches maturity and the options that are available to parent and child when they turn 16. At age 18, both the Junior ISA and the CTF become available to the ‘child’ to do with as they see fit but if no other action is taken the JISA will automatically turn into an adult ISA whereas the CTF won’t.
At age 16 the Junior ISA gives children the option of taking over the management of the plan themselves however, the CTF requires that the child take over the management. Neither plan of course allows the child (or parent) to access the funds until the child is 18.
Why The Switch?
As implied previously, the main reason for the scrapping of new CTFs was their cost to the government. At a time when the national budget had been squeezed from every angle the coalition government took the decision to save themselves an anticipated £320m-plus a year that CTFs would have continued to cost. In terms of a state contribution to child savings, the government do still however forgo the taxes that would otherwise be raised on the income generated by the investments in the new Junior ISAs.
In summary, both the CTF and the Junior ISA each have their own advantages and disadvantages whilst broadly sharing the same purpose and goals. Ultimately, parents are unable to choose between them and are restricted to one or the other depending on when their child was born, but the new Junior ISA, for what it lacks in state contributions, does offer parents and children increased flexibility and savings potential.
© Stuart Mitchell 2012
As the New Year dawns we often turn our thoughts to our finances and sorting out our planning for the years ahead. If you are thinking of putting money away for your children it is worth thinking about which style of account you want and what sort of access you need to the money that is being saved.
You also need to think about tax on the interest when opening an account for your children. Most people believe that children don’t pay tax at all but this isn’t true. Children pay tax at the same rate as adults it is just that the vast majority of children never reach their personal tax threshold of £7,475. There is a caveat to this tax position. A child can only have tax free interest of over £100 on any amount given to them directly for saving by a parent or step parent. This tax doesn’t apply to the junior ISA.
There are four main types of accounts that are tailored for children. These are regular savings accounts, fixed savings accounts, easy access accounts and the Junior ISA. Each type of accounts has both positive and negative aspects. I will now outline each type of account in a little more detail.
The Junior ISA is a new product released to the market in November 2009 and replaced the old child trust fund. The major difference from the old child trust fund and other children savings accounts is the amount of money you can save tax free. The old limit on a child trust fund was £1,200 a year. For a Junior ISA you can invest up to £3,000 a year. The allowance for the new junior ISA is more than double the current total allowed for the child trust fund. Taken at the basic level with no the total investment in the old child trust fund was £21,600 over the 18 years for the Junior ISA it is £54,000. The amount that you can invest each year will be linked to inflation and will increase as inflation increases.
The Junior ISA offers a solid way to invest for your child but the money is locked away until the child reaches the age of 18. This really is a long term invest option and one worth considering if you have the cash to spare over such a long time.
If you do not want your cash locked away for so long you could chose a fixed style savings account. These accounts tend to offer a slightly higher rate of interest than standard saving account but as with the Junior ISA the cash is placed in an account that is locked and the money can only be withdrawn after a set period of time. These fixed term accounts tend to work on 5 year cycles. If you are after a higher interest rate, have a decent lump sum to invest and you don’t need access to the cash then these types of account might suit you.
A regular saving account is tied to a money savings plan. For these types of accounts you pay in on a month basis for a fixed term and can then withdraw the cas
h at the end. If you want to save on a regular basis then these types of savings accounts are fine. The issue is that if you miss and payment of wish to back out of the plan you will lose your interest and have penalties applied for withdrawing the money.
The last type of account that you can have is a standard easy access account. This account allows you to save at your own rate and many can be opened with as little as £1.00. You can add and withdraw money as you wish but the interest rates tend to be really poor for this sort of account.
When deciding on a child savings account you need to think about the amount of money you can save and the ease with which you need access to that cash. If you are aiming for a long term investment then it is worth looking at the junior ISA.
Tony Heywood ©
Junior ISAs are going to replace the Child Trust fund in November 2011 as the most tax efficient way to save for you children’s future. So you have decided to open a Junior ISA to save for your child’s future and chosen the supplier of your Junior ISA account. So how do you make the investment grow into a decent amount over the 18 years it has to mature?
I have listed the top ten tips for ensuring that you keep the Junior ISA is regularly topped up.
Make your payments by direct debit.
If you set up a direct debit from your bank account on a monthly basis you will quickly get used to the money not being in your account. You will hardly notice it is missing.
Increase the payments in line with your pay.
When you get a pay rise then increase the payments you make into the JNR ISA account. Even if it is only a couple of pounds a month it will help keep the savings closer to the cost of living.
Look after the pennies.
Collect up your small change in a bottle, jar or piggy bank. The money soon mounts up and you can pay them into the account whenever the jar gets full. You should find it easy to get at least £5.00 a month this way
Don’t buy the paper and put the money aside.
Save the money you usually spend on the newspaper each day. You should be able to save somewhere between £5 and £15 a month. You can pick up free papers or read the important parts on the internet
Take a packed lunch to work.
You will be amazed how much money a month you can save by making a packed lunch for work everyday. Make sure you have enough supplies for the day so that you are no tempted to splash out on a packet of crisps or a chocolate bar. You can also make your lunch healthy and improve your health as well!
Walk more often
If you are popping out to the local shops or going to see friends then walk instead of driving. This will have double benefits, saving you money and making you healthier.
Buy Second Hand
Babies and children are expensive. Many items are used for very short periods of time especially new born babies. They are lots of baby stuff on sites like Ebay, Preloved, Gumtree and Craigslist. You should also be able to find local NCT baby sales. Buy you baby equipment and clothes second hand, borrow them from friends or even better join Freecycle and receive them for no cost at all.
Sell stuff
Use Ebay, Preloved or local free adverts to sell baby related items from Moses baskets to maternity clothes, baby toys to clothes that your child has grown out of.
Claim your benefits.
Make sure you claim everything that you are entitled too. Visit the benefits office to make sure that you get all the tax credit, nursery payments and family allowance. If you can afford it put some of this money into the trust fund every month.
Get Payments instead of presents
At Christmas and Birthdays get grandparents, aunts and uncles and friends to pay into the Junior ISA as opposed to giving gifts. If they don’t want to do this, some people like giving gifts, then buy less yourself and put the money you would have spent into the trust fund.
If you follow these tips then your Junior ISA should grow rapidly and become a health size over the course of its 18 year life span. Remember you can now place up to £3,000 a year into the Junior ISA compared to £1,200 a month for the old Child Trust Fund. . Remember that the year is not the standard tax year but from the child’s birthday one year to the next. So if you have extra money hold it over until their birthday has past.
Tony Heywood ©
What is a Junior ISA?
This article outlines what a Junior ISA is, who can open a junior ISA and what they have replaced.
A junior ISA replaces the child trust fund. The child trust fund or CTF were created by the last labour government in January 2005 for all children born after the 1st September 2002. They government provided a £250 CFT voucher that could be invested in a fund for the child that would reach maturity on the child’s 18th birthday.
The launch date for the Junior ISA is the 1st November 2011. The Junior ISA will be open to everyone under the age of 18 who missed out on a child trust fund. So children born before the 1st of September 2002 who are still under the age of 18 can invest in the new style children’s ISA.
There are two major differences between the Junior ISA and the old Child Trust Fund. The first is that there is no voucher or money from central government to start the investment. Those opening kids ISA will have to do so with their own cash. You are not granted a free by the UK government £250.
The other major difference is the level of investment that you can make each year tax free in a Junior ISA when compared to a child trust fund. The current limit on a child trust fund is £1,200 a year. For a Junior ISA you can invest up to £3,000 a year. The allowance for the new junior ISA is more than double the current total allowed for the child trust fund. Taken at the basic level with no the total investment in the old child trust fund was £21,600 over the 18 years for the Junior ISA it is £54,000. The amount that you can invest each year will be linked to inflation and will increase as inflation increases.
There are two types of Junior ISA on offer. These mirror the structure for standard ISAs. You can have a stocks and shares ISA. This is called an investment Junior ISA. The other type of Junior ISA is a cash ISA which earns interest like a standard savings account but tax free.
Money in a Junior ISA is locked away until the child reaches the age of 18. You cannot withdraw the money from the ISA before this date.
You cannot have both a child trust and a junior ISA. Those who currently have child trust funds cannot open a Junior ISA as well. The government may well merge the two products and are likely to adjust the allowance for child trust funds so that it matches the more generous allowance that has been granted to the Junior ISA.
You cannot open a junior ISA before the launch date on the 1st November 2011. If you child was born after 3rd January 2011. If you child was born between 1st September 2002 and the 31st December 2010 then they will have the child trust fund as the method of saving.
Tony Heywood © 2011
The Conservative – Liberal Democrat coalition have begun to make changes to the Child Trust Fund, and will be scrapping the scheme altogether in the new year. The Child Trust Fund was bought in by the previous Labour government with parents given a £250 voucher to invest on behalf of their new born children, following by another £250 voucher when their child turns 18. Both of these amounts have been double for children in families earning a combined total of less than £16,190 a year. There are three different types of account where parents are currently able to place this investment. Family and friends can invest a further £1,200 a year. The idea was to build up savings for children that they would then be able to use once they became an adult. Only the child is allowed to take the money out, and only once they have passed their eighteenth birthday. With £500 invested by the government plus up to £1,200 a year (£21,600 in total) by family and friends, once interest has been added this could lead to a significant sum of money after 18 years.
Both the Conservative Party and Liberal Democrats were against the Child Trust Fund is the form it was in, and stated so in their pre-election manifesto’s. The Conservatives wanted to scrap it for all but those who are less well off, probably those earning less than £16,000 per year, while the Liberal Democrats wanted to scrap the scheme altogether. It seems as though the plans are closer to what the Lib Dem’s wanted.
The Child Trust Fund will be completely scrapped from 1st January 2011. Until then vouchers at birth will still be given but only at £50 instead of £250. This is again doubled for those families earning less than £16,190 a year. Parents of children not born yet will receive the voucher if born before January but not if born afterwards. Vouchers contain an expiry date and parents whose children are born prior to January have until the expiry date to invest the voucher even if this is after the Child Trust Fund cut-off date. Vouchers at the age of 7 have already been discontinued, so are no longer received. This was scrapped in August.
Existing accounts will continue as they are until they mature. Therefore those who have already received both the voucher at birth and at age seven will be unaffected by the changes. Those have received the initial voucher but not the second one will have the same benefits minus the second £250 investment by the government. In both these cases family and friends will still be able to make the £1,200 annual investment into the account.
It is children of the future who will be impacted. However a new government scheme is set to be bought in, called the Junior ISA. The Junior ISA will work in a similar way to the Child Trust Fund but without the government investment. Amongst the advantages will be tax free investment, but the restrictions will also remain in place with a maximum investment of £1,200 a year. The future of child savings by parents on behalf of their children looks like it could be the Junior ISA.
With the child trust fund consigned to history it is important to select the best child savings plan
http://ezinearticles.com/?The-End-of-the-Child-Trust-Fund&id=5399837
Andrew Marshall (c)
Many parents like to save for their children when they can and there are many ways of doing this. This article looks at some of the popular types of children savings accounts.
Regular Children’s Savings Accounts
These are amongst the most common methods used by parents to save on behalf of their children. They are set up in the child’s name but controlled by parents who can deposit and withdraw money as they please. It is a good idea to make deposits on a regular basis to gradually build up the amount accumulating within the account. Some put in a set amount every month while others make payments when they have a little money spare and can afford to. Some choose to pay any money children receive for Birthday’s and Christmas from family members into the account. Parents have complete control of the account and can switch this over to the child when they see fit, whether this is when they turn eighteen or twenty-one, or earlier such as when they start to want to buy things for themselves. Because parents can also withdraw from the account they can use it to pay for things their child needs or wants. The disadvantage of regular children savings accounts is that they do not have the highest interest rates.
Children’s Bonus Bond
A children’s bonus bond is a scheme whereby parents can invest a lump sum on behalf of a child and this sum then accumulates tax free interest. This amount can remain in the account up until the child’s twenty-first birthday but they have control of the account from the time that they turn sixteen. After the account has been active for five years there is a bonus, which is also tax free. It can be cashed at anytime but if done so within the first year none of the accumulated interest is received. The idea of the scheme with the lack of interest prior to the first year and the five-year bonus is to encourage long term savings.
Fixed Term Savings Accounts
With a fixed term savings account payments are made as parents choose, but money cannot be taken out until a fixed time period has passed. This can be anything from one year to five years. The major advantage of these accounts is the high interest. As a bank or building society knows the money will be there for this fixed period they will offer a higher interest compared to other types of accounts. The disadvantage is that you are unable to withdraw until this time period has elapsed.
Child Trust Fund
The child trust fund is going to be discontinued, but that does not mean it has no value to those who are already benefiting. The child trust fund is a government scheme whereby the government gives a £250 voucher to parents of new born children to invest on their behalf and another voucher of the same amount when they turn seven. Children don’t have control until they are eighteen. Family and friends can invest up to £1,200 a year on top of this. This part of the scheme will continue as with other benefits such as investment being tax free. So for those already on the scheme and past their seventh birthday it will be unchanged. For those under seven they will not receive the second payment. Although this will be discontinued the government is likely to bring in another scheme, the Junior ISA. This will be similar but without the two government contributions. So essentially it will be the same minus a total of £500 worth of investment.
Andrew Marshall (c)
Jump Savings are a provider of Children Savings Accounts.
Source
http://ezinearticles.com/?Types-of-Childrens-Savings-Accounts&id=5529731
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