Taking a gamble on your child’s character
FOR those looking to save for their children, the slow drip-feed of information on the new Junior Isa (Jisa) has been frustrating. With yesterday’s update, we are a step closer to getting the final details – although questions remain, particularly in how child trust funds (CTF) will fit in with the new regime. But one question won’t go away: can you trust your future 18-year-old child with a sudden potential windfall of over £100,000?
Despite calls to match the £5,340 contribution limit for Isas, it was confirmed yesterday that the limit of Jisas will be £3,600, more than the £3,000 originally announced. Also, CTFs will match this limit, tripling from the current level of £1,200. After 5 April 2013, these allowances will rise annually in line with consumer price index (CPI) inflation. This will allow a significant amount of savings to be sheltered from extra taxation. Roger Thompson, head of UK business at JP Morgan, says “the figures speak for themselves” – he calculates that by investing £3,600 for 18 years, with 5 per cent return per annum, your child would accrue a savings pot worth over £100,000.
A TWO TIERED SYSTEM
Kevin Mountford of moneysupermarket.com advises parents: “Generally, child savings rates are low across the market, so anyone saving into a Junior Isa should be prepared to shop around for the best deal, and ensure they switch regularly in order to maximise the return when the child turns 18.” However, those with CTFs will not be able to shop around, as the rules are that you can only get a Jisa if you don’t have a CTF, with no transfers currently allowed between them. As such, despite broadly welcoming the Jisas, experts across the investment industry have been widely critical of the failure to deal with those stuck with CTFs. Danny Cox of Hargreaves Lansdown thinks the government should permit “a choice of CTF or Jisa and allow transfers between the two – in this way the market decides.”
Jason Witcombe of Evolve says it’s illogical for CTFs and Jisas to run concurrently forever, so some form of amalgamation seems likely. He thinks: “Just as Peps didn’t need to be scrapped and changed to Isas, it would have been more logical to expand the remit of CTFs rather than launching a whole now product,” concluding: “that’s politics for you.” There will certainly be a lot of pressure on the government to deal with the CTF issue – particularly given the previous government’s role in providing financial incentives to parents from poorer families to start saving through CTFs.
A MATTER OF TRUST
Wary of parents using their offspring’s allowance to shelter their own savings from tax, the government is unlikely to change tack on its decision to grant children access to the savings at 18. Patrick Connolly of AWD Chase de Vere thinks despite the concerns many parents have in having no control over the money, “the tax advantages and simplicity of the Junior Isa, combined with good quality investment fund options, should lead to it becoming the default option for children’s savings.”
“Parents need to make a judgement as to how responsible their child will be at 18 and that is clearly very difficult,” says Witcombe. David Truman, head of the private clients practice at Menzies says parents will be worried that instead of using it for education or a mortgage, their children might be tempted by “more tangible pleasures when they reach 18-years-old,” As such, Witcombe suggests “parents might choose to focus on their own finances, save in their own names and then give their child lump sums as and when they see fit.” Cox says parents and relatives could save in their own names and then make one big gift – but this could have inheritance tax consequences – or use a trust, with the proceeds distributed at any age. But he notes that discretionary trusts are less tax efficient than Jisas and involve expense to set up and administer. Trust is essential for all familial relations, but £100,000 worth of trust in an 18-year-old might be pushing it.