Wednesday, October 3, 2012

Junior ISA One Year Old

Having been in operation for a year it is time to look at whether the Junior ISA has been a success. This savings plan for children was set up by the government as a way for parents to invest on behalf of their children.

A Junior ISA allows parents to invest up to £3,600 every year with no tax having to be paid on interest or capital gains. A child will gain access to their ISA upon their eighteenth birthday. At that point they can transfer it into a regular ISA and, should they so choose, start to use the money as they see fit.

Whether the first year of this children's ISA can be considered a success or not depends on how you perceive success in this instance. An obvious comparison that will be made is with its predecessor, the Child Trust Fund, which was introduced by the Labour government in 2005, with children born from 2002 eligible. Under that scheme parents were given a £250 CTF voucher upon their child's birth to invest on their behalf. Had this not been invested after a year then an account was automatically opened for them. They could then contribute up to £1,200 a year towards the fund and were given another £250 voucher when their child turned seven years old (although very few reached this age before it was discontinued). There is one main benefit and one main disadvantage of the JISA compared to the CFT. The main benefit is the higher allowance with the lack of the initial government contribution being the key disadvantage.

If comparing the Junior ISA with the Child Trust Fund, the number of accounts opened has been significantly lower than the number of accounts opened in the first year of the Child Trust Fund. This isn't really an accurate comparison, though. Not only does it include accounts that were automatically opened after a year, but parents had more of an incentive to open an account. With no government Junior ISA contribution it means that those who are not planning to make regular contributions do not have the same incentive to open an account. On the other hand, of the accounts that have been opened the average contributions have been higher. These two comparisons suggest that fewer parents have had sufficient incentive or funds to open an account but, of those who have, they are contributing more. This is, in part, because they are able to contribute more due to the allowance being three times as much.

There may have been more Junior ISA accounts opened were it not for the regular adult ISA, which has a much higher allowance of £11,280. It has been suggested that many parents are choosing to use part of this ISA allowance to effectively invest on behalf of their children. For example, parents that might wish to invest £2,000 on behalf of themselves and other £2,000 on behalf of their child might invest the full £4,000 in their ISA, rather than putting £2,000 of it towards a Junior ISA.

The long term success of the Junior ISA remains to be seen. Though we can look at trends, one year is too soon to realistically judge how successful it will be, especially considering the current economic climate.

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