HM Treasury has today published draft regulations for the new Junior Individual Savings Accounts (ISAs).
Plans for a Junior ISA were originally announced in October 2010. The draft regulations published today have been made available for consultation until the end of May and then will be made law when existing ISA rules are amended.
Junior ISAs will replace the Child Trust Fund (CTF) which has closed for children born from 3rd January 2011. They will be available to every UK resident child who does not have a Child Trust Fund, including children born before the Child Trust Fund was introduced in September 2002.
There looks set to be an annual contribution limit of £3,000. Any person will be able to contribute to a Junior ISA, as with a Child Trust Fund.
Unlike the Child Trust Fund, there will be no contribution from Government.
As with ordinary ISA accounts, there will be cash Junior ISAs and stocks & shares Junior ISAs, with the annual allowance split between the two types of account. The rules about which investments can be held in a Junior ISA will be the same as for an adult ISA.
Access to the money held within a Junior ISA looks set to be one of the most problematic issues with these new investment accounts.
There will be no access to the money until the child reaches their 18th birthday, except if the child is terminally ill or dies.
Once the child reaches their 18th birthday, the Junior ISA will automatically become a regular ISA account, with the child having full access to the money.
This is likely to deter many parents from making use of the new Junior ISA facility. There is a substantial risk that an eighteen year old will make unwise decisions about the tens of thousands of pounds their parents, grandparents or other relatives have diligently saved for them over the course of their childhood.
What could have been established to fund university costs or provide a deposit for a first home could be spent on foreign holidays, alcohol or a motorbike. This problem surrounding access was also apparent for the Child Trust Fund, with many parents referring to these as “The Motorbike Fund”.
As many adults fail to make use of their own ISA allowances, a more sensible course of action might be to use the ISA allowance for one parent, nominally earmarking this as money for a child or children.
Where Junior ISAs do seem to have the potential to be superior to the Child Trust Fund is the likely range of providers and funds available.
One drawback associated with the Child Trust Fund was a reasonably small range of providers. We are hoping to see fund supermarket and wrap platforms offering their own Junior ISAs this autumn, which would offer access to a wide range of funds, hopefully with much more competitive pricing than typical CTF funds.
Leaving aside access concerns and the availability of competitively charged funds, without a contribution from Government we do not see Junior ISAs living up to the hype surrounding them on the news of their launch today.
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