Junior Isas: Have they been a success?

Money Talk by Darius McDermott,
Managing director, Chelsea Financial

image captionJunior Isas have been available only since November 2011

The 1 November marks the first anniversary of the Junior Isa (individual savings account), a tax-efficient savings vehicle for children.

A mini-version of the long-standing and popular adult Isa, the Junior Isa allows parents, grandparents and family friends to invest in cash and stocks and shares, but on behalf of their children.

That sounds good, but recent reports have been less than favourable, pointing out the lower take-up rates and monies invested compared with the Child Trust Fund (CTF) - the product it replaced.

Indeed, at first glance, the figures do look a little disappointing.

According to HM Revenue & Customs (HMRC), in the first five months of the Junior Isa (from 1 November 2011 to 5 April 2012), just 72,000 accounts were opened, totalling £116m.

I say "just", as there are six million eligible children, so the take-up rate works out at a little above 1%.

That is not overly inspiring, especially when you consider that, using the comparable introductory period for CTFs for children born between September 2002 and April 2003, 415,000 accounts were opened.

But if you look a little more closely at the figures, there are some encouraging signs.

'Broader appeal'

For starters, the government provided an initial incentive to open a CTF in the form of a voucher worth £250 or more.

And of those initial 415,000 CTFs, more than a quarter were opened by the government when the parents failed to do so.

And of the five and a half million CTF accounts opened by April 2011 (the most recent available data from HMRC), only 18% had had further contributions added by parents in that tax year.

These additional parental contributions totalled £325m but, on average, this worked out at just £321 per account.

By contrast, the national average held in a Junior Isa already stands at £1,614.

So actually, £116m in five months does not look so bad after all, especially when you consider the current economic environment and the squeeze on household finances.

While there may not have been a big initial take-up in terms of numbers, those who are using it are doing so with a lot more vigour.

The voucher from the government may have been an incentive to open a CTF account, but it does not seem to have worked as an incentive to keep saving.

So that raises the question - what can we do to encourage more people to use a Junior Isa?

Huge difference

Recent research from Family Investments showed that 92% of parents with children under 18 said they thought it was important to save on behalf of their child, but more than half (56%) still had not heard of a Junior Isa.

image captionModest savings could roll up into a significant sum by the age of 18

This figure is better than last year when 73% had not heard of it, but it is still quite high.

The need for long-term savings for children has never been greater.

The spiralling cost of university fees, increasingly large deposits required for first-time house buyers and life's other inevitable expenditures, mean that children today are likely to face significant financial pressure as they enter adulthood.

It will be nearly impossible for them to stay out of crippling debt without the continued financial support of parents and grandparents.

Worse, these high-cost items may inhibit future generations from saving for their retirement, which could consequently plunge them into poverty in their old age.

So more needs to be done to combat the negative headlines, and to encourage a life-long savings culture.

Even small amounts of money invested regularly can make a huge difference over time.

Putting away £50 each month over 18 years, assuming an annual growth rate of 4%, could leave you with a pot of £15,800.

If you are able to put away the maximum amount of £300 a month into a Junior Isa, it could be worth almost £95,000.

That is an amazing start in life for any young adult.

Decent start

Junior investment Isas are readily available from discount brokers, fund supermarkets or through financial advisers.

It is an idea to look out for charges to make sure you are getting value for money.

Some providers will charge an initial fee, some will not, and others charge for switching investments.

So do some research.

Junior cash Isas are available from most banks and building societies.

You can search for the best rates available through comparison websites.

Just search on the internet for for "best cash Junior Isa" and go from there.

As alluded to earlier, Junior Isas are not just for babies - children born before September 2002 but still under 18 are also eligible.

Looking at our own client base, parents with these older children are certainly making the most of this product.

Probably the most surprising trend is that 68% of Junior Isa accounts have been opened on behalf of older children.

The average amount held for older children is also considerably higher.

At £2,988 it is, in fact, 60% more than the average for babies (£1,838), as parents try to save as much as possible in a shorter period of time.

One year on, and it appears Junior Isas have made a decent start, contrary to the negative headlines.

But it is clear that they need to be better publicised so that parents wanting to save money for their children are better informed about their options.

Now, one thing that parents should bear in mind is that, at age 18, a Junior Isa (and CTF for that matter) goes straight to the child and therefore it is entirely their decision what the money is spent on or if the money is to be left invested (rolled into an adult Isa, for example).

This may fill some parents with dread as even the most sensible of children may have different dreams and goals to their parents.

But it does remain a good, tax-efficient way to give your child a decent start in life.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation.

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