If you have been wondering what will replace the child trust fund (CTF), wonder no longer. It is the junior individual savings account (Jisa).
From 1 November this year, parents with eligible children will be able to open a Jisa. Then they, and any other interested adult who feels like it, will be able to deposit up to £3,000 into the account every year. On the plus side, that’s £1,800 more than could go into a CTF. Once inside, all the money is free from capital gains tax (CGT), income tax and further tax (beyond the first 10%) on dividend income. However, unlike a CTF, the taxpayer will not be contributing anything extra. So how good is this deal?
There is one big problem with the Jisa. And it’s the same one that bothered us about the CTF scheme: once you’ve put money in you can’t get that money back. It will sit there until your child turns 18, at which point they have full control of the funds (they get management control at 16, but can only actually take the cash at 18). So if you put in £3,000 a year and it grows at, say, 6% a year, there will bemore than £95,000 in the account by the time a child reaches 18. But you’ll have no say in how it is spent.
Even if you trust your child not to blow the cash, can you afford to tie money away for such a long period? What happens if you have some sort of personal financial crisis in the meantime? It seems to us that most investors are better off sorting out their own finances before worrying about those of their children. After all, creating a sizeable pot for your offspring is a bit pointless if the first thing they have to do aged 18 is bail out their parents. In short, several other priorities come before a Jisa.
For starters, clear debt. Then start saving for your retirement with a pension. Most of us are woefully underprepared for retirement. So save your children the burden of financing your old age by making sure you do some decent pension planning. Also ensure you use your own Isa allowance before you start on theirs.Adult Isa money isn’t subject to any time lock (unless you choose one), so you can get your hands on your cash if an emergency crops up. If it doesn’t, then when your children reach 18 you might choose to hand over these savings to them. Equally, you might use the money to go on a jaunt to celebrate your new-found freedom – the choice will at least be yours.
That said, if you’re a financially secure grandparent, Jisa’s make better sense. It is possible (but not yet confirmed) that they won’t be subject to inheritance tax. So for wealthy grandparents a Jisa may be a way to keep cash away from the taxman.