This article is part of Morningstar’s Guide to Financial Planning, your handbook for making the most of your tax-free investing opportunities, reducing your annual – and lifetime – tax bill while keeping HMRC onside.
Junior ISAs allow you to save on behalf of under-18s tax efficiently. Just like an adult Isa, you can chose to shield cash, stocks or investment funds from HMRC, but unlike the adult Isa, investments cannot be cashed in at any time – the child must reach 18 before they have access to funds.
Parents, grandparents, friends and guardians can invest on a child's behalf and the income and profits earned on the investment will be income tax and capital gains tax-free.
There is a wide selection of stocks, funds and ETFs which are eligible to be held in a JISA wrapper, as well as a cash products provided by banks and building societies.
As with adult ISAs, the child is given an annual allocation, which must be utilised before April 5 2015 or it is lost. This tax year’s allowance is £3,840 which parents can choose to invest into stocks or funds or can save into a cash account.
Any child born before September 2002 who did not have a Child Trust Fund is eligible for a JISA, as are all children born on or after January 3, 2011.
Once the child reaches 18 the JISA is automatically transferred to adult ISA status and the money can be accessed. At no point does it cease to be tax-efficient.
As with adult ISAs previous years’ savings can be transferred into new cash products come the tax year in order to make the most of the new interest rate. But unlike adult ISAs, you must choose just one provider at a time to manage your investment JISA or cash JISA.
You cannot for example have choose to save your 2014/15 allowance in a Santander cash JISA and then your 2015/16 allowance in a Nationwide cash ISA unless you transfer the balance.
Equally, any investments made in a JISA wrapper must be managed through the same fund supermarket each year. Most fund platforms including TQ Invest, Fidelity Fundsnetwork, Hargreaves Lansdown, and BestInvest offer JISA facilities.
As Junior ISAs take up to 18 years to mature it is a good opportunity for parents who wish to invest on their child’s behalf to choose holdings that may be volatile in the short-term but offer potential long-term gains.
Child Trust Funds
Child Trust Funds (CTFs) will finally be eligible to transfer into JISAs on April 6, 2015. The deregulation bill is currently being finalised, with confirmation expected in early January.
This is the conclusion to a long battle for children locked in CTFs, considered an inferior financial product because of the complicated structure and restricted investment options.
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