The Tax Efficient Way To Save For Your Children.

All children could benefit from the lump sum that a Junior ISA (savings account launched just last November) with help from their parents in the future. Only children who were born before 1 September 2002 or after 2 January 2011 can qualify for this scheme, as anyone born between these dates was able to get a Child Trust Fund (CTF) instead.

CTFs were axed under the initial round of government spending cuts after Gordon Brown left office, leaving millions of children without the option of saving. Parents and savings experts alike are lobbying the government for a change in policies that would allow CTF babies into the generally higher-paying Junior ISA market, but lawmakers have thus far not rallied to the cause.

Specifics

The main difference between the Junior ISA and CTF is that the latter came with a government voucher to kick start savings, while the Junior ISA relies completely on parents, grandparents, other family members to top-up children’s accounts.

The children can have £3,600 saved in their name each year, though the limit is set to increase in line with the consumer price index for inflation in the 2013-2014 financial tax year. This £3,600 can be invested into stocks and shares, or cash deposit account, or any mixture of the two. The option to hold both types of accounts is particularly good for parents who want to take advantage of the historically higher returns that a stocks and shares Junior ISA account offers, but want to mitigate risk to their child’s nest egg by saving partially in a potentially safer cash Junior ISA.

Over the course of 18 years, equity investments typically have a higher performance than cash, but this is a decision that parents should consider carefully.

Tax Efficiency

One of the main draws of the Junior ISA is that all money saved for the child is free of capital gains tax, and the child can withdraw it free from any further tax when they turn 18. Parents can circumvent the ‘pound;100 rule’ this way, as in normal taxable accounts children are taxed on any income over £100 that their investments earn if the money was a gift from their parents.

The tax-free nature of the Junior ISA is also an attractive aspect for grandparents who are looking to transfer their wealth to future generations. A Junior ISA for each grandchild may not exclude them from paying inheritance tax entirely, but saving the maximum yearly amount for 18 years could shelter a huge slice of wealth from the taxman, completely legally.