Are junior ISAs worth using?

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Fidelity has stated the Junior Isa will “bring to parents and children a unique and compelling set of benefits and tax advantages”.

Really? Well I suppose there is tax-free interest – though children do have their own tax-free allowance and I doubt few but the richest breach it.

I suppose this will get around the byzantine tax rule that only allows children to earn £100 a year interest on money given to them by parents. Breaching this can trigger a tax bill at mum or dad’s highest marginal rate.

But I somehow doubt this has ever been tested – and any child who earns £100 a year is probably doing better than most adults.

Perhaps all the excitement is because children will be able to have stock market investments in their own name for all the good it is likely to do them.

Fidelity also tells us (and take a deep breath before reading this) that “assuming the maximum Junior Isa allowance is invested from birth (Apr 2011) to 17 (using 2011 amount adjusted for 2 per cent inflation each year with annual growth rate 5 per cent, no adjustment for inflation or charges on savings) the child would have £226,909.88 by the time they were 30 or £1,013,775.30 by the age of 60”.

Wow – if I understand that correctly, by putting in £3600 a year, they might in 30 years’ time have enough for a house deposit. Of course that does rely on low inflation and rather better investment growth than most funds have managed over the past 10 years.

Of course this is pie in the sky. Very few parents can afford to put away £3600 a year for their children.

And how many would want to risk their children blowing the money when they are 18? Many will feel it is far better to keep the money under their own control so they can decide how it is spent.

I can see that Junior Isas offer a great opportunity to fund managers and banks to pull at the emotional strings of parents and grandparents.

But whether a decision to invest in a Junior Isa in preference to one’s own Isa or pension would, for the vast majority, be rooted in any logic is highly debatable.

The good news if you do go ahead -

Parents opening the new Junior Isa can earn 0.9 per cent more interest in the cash version than those stuck with a Child Trust Fund (CTF).

Junior Isa savers also have a far wider choice of funds and shares to invest their money in until they are 18

My feelings are that generally parents are better off using their own ISA allowances fully and only then deciding if they want to use a junior ISA. Using grandparents allownace s could aslo be a good idea but take care of any inheritance tax issues first.


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