Everyone loves the idea of the proposed new Junior Isa.
Hargreaves Lansdown says it “has the potential to be the most successful children’s saving scheme of all time”. Chase de Vere “fully supports” it and thinks it “should become the default option for children’s savings”. Fidelity “welcomes” them on the basis that the government “has created a framework that not only allows parents to plan for their children’s future but will help teach younger generations the importance of savings“.
And they aren’t the only ones. Have a quick skim on Google and you’ll find all manner of complimentary guff. But will the so-called ‘Jisa’ really be much good to many people? I wonder.
It is a simple idea. If your children don’t have a Child Trust Fund (CTF), from November, you can set up a Junior Isa for them. You – and anyone else who fancies chipping in – can then put up to £3,000 a year into the account.
This can be kept in cash or invested in the markets, with the returns being tax-free.
That sounds OK. But it comes with all the same problems as the Child Trust Fund.
First, it promotes the idea that saving for your children is a good end in itself, regardless of your circumstances. This simply isn’t true.
We are gradually getting a grip on our finances as a nation but still most of us have too much personal debt and few of us have much in the way of a pension: the average personal debt in the UK is £8,700 and the average pension pot a mere £25,000.
How will our children feel about their Jisa when they find that having it at 18 means they end up paying our nursing home fees when they are 35? Not too good, would be my guess. Parents should make paying off their own debts (including their mortgage) and saving for their own pension their number one priority.
One of the greatest gifts we can give our children is our own financial stability.
But even when we have done this, it isn’t clear to me that the Jisa should be our next stop. Let’s not forget that, just as with the CTF, you can’t take money you put into a Jisa back if have a financial emergency. And, worse, you lose complete control of the money when your child hits 18.
So, how can you be sure that your child will spend your hard-earned cash on their university costs? Might you actually have made sacrifices just so your child can lounge on a Thai beach for three months?
It’s a risk that doesn’t seem worth most parents taking, given that their own Isa allowances are relatively high. This year’s Isa allowance is £10,200 and next year’s is £10,680. So, a higher-rate taxpaying couple can now save well over £20,000 a year tax-free in their own names. Not many people put that much away.
So, if you want to save for your children, why on earth not do so via your own tax-free savings vehicles? You get the same tax benefits and you get to keep control.
Clearly there is one group that the Jisa will make sense for – the very well off. If you have already paid off your mortgage, sorted your pension and dabbled around in a venture capital trust or two, why not chuck a little extra into a tax-free vehicle for your kids? After all, you won’t be needing it.
It also makes sense for rich grandparents. It seems likely that the £3,000 isn’t to be included in estates for inheritance tax purposes. So if they have a pile of grandchildren they can use this on top of various other avoidance schemes to get more of their estate out of the tax net.
The government will say, on the plus side, that, thanks to the tax breaks, the Jisa will be a great way to get low-income kids saving. But why? Lower-income children are most likely to have cash Jisas. However, they also have the usual income tax allowance and there is no way interest on £3,000 every year is going to push them over that. So, they might as well just have an ordinary account and move into a cash Isa when they start earning.
Add all this up, and the Jisa – to me – smacks more of complicated gimmick than useful scheme. Just like the CTF.
Finally, a word on the mansion tax. There is a view that we need to have a tax on wealth of some kind, just like many other European countries. But those that do have high property taxes such as Denmark, Sweden and even Israel have very low inheritance taxes (15%, 0% and 0% respectively).
We don’t – ours is 40%. Add in a property tax, and we are taxing wealth at least twice.
That doesn’t seem right. Surely, if the coalition really wants to tax wealth, it should note that it already has a system in place that does just that (inheritance tax) and then work on cutting down on any loopholes in the rules. The new Junior Isa isn’t exactly a step forward here.
• This article was first published in the Financial Times