Is the Junior ISA the best way of Saving for Children?

The Junior ISA savings scheme will be in operation from 1 November 2011 and will allow parents to make up to £3,600 of tax free savings a year on behalf of their children. That is equivalent to £300 a month or £64,800 over an eighteen year period, with the limit rising with inflation from 2013. Parents will have a choice of paying into a cash JISA or a stocks and shares JISA.

The Junior ISA, then, is the new children’s savings scheme set up to replace the scrapped child trust fund. But, is it the best way for parents to save on behalf of their children?

As with adult ISA’s the two types of Junior ISA available are cash ISA’s and stocks and shares ISA’s. A cash ISA is a safer investment. As it is a savings account the money is not going to disappear. However, the potential gain may not be particularly high. A stocks and shares ISA is riskier but potentially more rewarding. You are investing in the stocks and shares of companies, which can fall as well as rise, but can rise much more significantly than cash ISA’s. The likelihood is that over the long-term a stocks and shares ISA will produce a better return but it is not guaranteed.

For those able to invest a relatively large amount the Junior ISA is significantly better than its predecessor, the child trust fund, which had a limit of £1,200. The Junior ISA’s limit is three times this, and therefore allows for a high amount of tax savings over the long-term. There is still a limit though, so those wishing to invest significantly more than £3,600 a year may look elsewhere. Those only able to save a very small amount may not reach the taxable level, so they may also look at other options if they can get better interest rates.

Everyone likes to save on tax if they can, and with a Junior ISA investment no tax is paid on any gained interest. This is the main benefit of the scheme over other investment products. For anyone likely to invest over around £25 a month over the course of their child’s childhood, this will be an incentive to turn to the scheme. If saving lower than this it may not reach the tax threshold (depending on the amount of interest).

As mentioned already, there is some risk with stocks and shares ISA’s, meaning some may shy away from them. There is still the option of a cash ISA though, where there is no risk. Another option is investing in investment trusts, where the risk is spread across different investment products, meaning one unsuccessful investment would not wipe out the entire fund.

On balance, the Junior ISA is a good option for most parents who are able to make investments on behalf of their children, in particular for those able to invest on a monthly basis. Children whose parents invest up to the £3,600 limit will be able to make some significant tax savings.

Andrew Marshall (c)