October 17th, 2011
Are you ready for Junior ISAs?
Meet me at Investor Shows
From November 1, 2011, Junior ISAs can be opened to anyone aged less than 18 who is not already eligible to have a child trust fund. That means children born before September 1, 2002, or after January 2, 2011.
The maximum yearly contribution for a Junior ISA is £3,600, but this will be uplifted in line with the Consumer Prices Index measure of inflation from 2013/14 tax year onwards. Until then, parents, grandparents, other relatives and friends and the children themselves can contribute up to £3,600 a year.
All money saved or invested in the Junior ISA account belongs to the child and will be locked away until they reach adulthood at age 18. Money in a Junior Isa can be put on deposit or invested in stocks and shares.
Junior ISAs are tax-free savings vehicles for children and the successor to child trust funds which were scrapped in January 2011.
Taking the long view
Look at your children now and you'll foremost think of their education, marriage or career, not retirement. Now, though, with the introduction of Junior ISAs it may be a smart move to set them up with a stocks and shares ISA for their retirement.
Just imagine, you as parents and/or grandparents, bankrolling or subsidising an annual £2,000 Junior ISA contribution for just five years, starting when the child is at age 13? You are just putting your teenager in line for them to potentially receive £10,000 annual tax free retirement income from that original seed money, when they retire.
In fact: you are gifting 50 years of compound growth.
Why not get your kids to participate?
Your child doesn’t need to fork over his or her own savings to fund their own ISA. But why not offer to match their contribution to get them interested in long-term saving and investing?
To get your kids in “saving mood” consider offering them a generous matching contribution. Why not stimulate them to save via a Junior ISA when you match part of their wages from any job - babysitting, mowing lawns, waiting tables – when they invest some of it in their ISA? Say, for every pound they contribute, you pitch in £10. Or £20. That should make it fly with your teen.
Get the family involved
Once launched, Junior ISAs should be popular with grandparents, aunts and uncles. They should enjoy knowing that they are helping to build something, not just giving away money without a goal.
Also giving ISA contributions is a smart way to transfer assets from one generation to another.
The £3,600 maximum Junior ISA contribution almost equals the 2011/2012 allowance to give away up to £3,000 each tax year, per person, or £6,000 a year for a married couple. Consider splitting your allowance to cover all your under-aged grand children.
A minor consideration
Keep in mind that from the age of 16 the recipient can take complete control of the ISA account. At 18, the Junior ISA account converts into a full-blown ISA and the new adult can do what s/he likes with this pot.
So you might want to start talking with your kids now about what your hopes and wishes are for this money, and how that may not include any early withdrawals for a drink binging weekend at Magaluf, at 18, or a car.
That said, an ‘adult’ ISA can be accessed well before your (grand-)child hits retirement age. All contributions as well as the returns can be withdrawn, fully tax-free, at any time. Nor any early withdrawal penalty or any income tax are due based on current tax legislation.
The small print
There are two types of Junior ISAs: one for cash and the other for stock and shares, and children can have one of each. As with adult ISAs, Junior ISAs protect savings and investments from the taxman, which means no capital gains tax, no direct tax on dividend income, and no income tax on savings interest.
A strange quirk in the ISA rules allows those in their 18th year to invest in both a Junior Stocks & Shares ISA and an 'adult' Stocks & Shares ISA in the same tax year. This means £14,280 can be invested in an ISA - in a single tax year!
Here's how it works:
Junior ISAs allow subscriptions until the eve of the child's 18th birthday. From 6 April one year until 5 April the next year up to £3,600 can be invested into a Junior ISA.
On a child's 18th birthday they become entitled to the full 'adult' ISA allowance of £10,680. Subscriptions made to the Junior ISA currently have no bearing on the 'adult' ISA allowance. This means that in their 18th year between 6 April and their 18th birthday Junior ISA contributions of up to £3,600 can be made and between their 18th birthday and 5 April 'adult' ISA contributions of up to £10,680 can be made.
For one year only your child could make contributions of up to £14,280 into tax privileged ISAs (tax year 2011/12).
What is there not to like with the introduction of Junior ISAs?
Meet me at Investor Shows
I am attending two Investor shows, including:
- tomorrow the London Investor Show is taking place at London Olympia. Register and use “VIP” for free access, and
- the World MoneyShow London which is taking place on 11-12 November, at the Queen Elizabeth II Conference Centre, Westminster. Click here for Free registration.
It would be great to meet up at the show if you are also planning to attend. Please leave me a message via the
See you at either show.
Until next time.
Early Retirement Investor.com
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