Give your child £95,000 tax-free with a Junior ISA

The Government has finally unveiled details of its Junior ISA scheme. Is it an adequate replacement for Child Trust Funds?

With exquisite timing, my son was born too late to qualify for a Child Trust Fund. The brainchild of the previous Government, Child Trust Funds came with a £250 voucher from the Government and offered a tax-free home for savings for your child’s future. Of course, they were scrapped very quickly once the Coalition came into power.

I’ve already written about the alternatives for parents looking to save for their children’s future in What to do with your child’s savings, but we now have Junior ISAs to take into account too. Last week the Government finally unveiled initial details of how they want Junior ISAs to work. Of course this is still at consultation stage, so there is room for some manoeuvre, but the plans give us a good idea of what they will look like.

So let’s take a look at what we now know about Junior ISAs.

The launch date

Firstly, they will not be officially launched until the start of November this year. That’s in order to give the banks and building societies time to work out exactly what their own Junior ISAs will look like, as well as getting their systems ready for the launch.

Personally, I think it’s a little disappointing that we have had to wait so long between the scrapping of Child Trust Funds and the launch of Junior ISAs, but better late than never.

How they’ll work

Junior ISAs will work in pretty much the same way as their adult counterparts. They will come in two distinct forms – a cash ISA and a stocks and shares ISA. Each child will be able to have one of each at any time. However, if the child already has a Child Trust Fund, they will not be able to move the savings from the fund to the ISA, or vice versa.

How widespread will they be?

According to Government calculations, around six millions children will be eligible for the Junior ISA at launch. And a further 800,000 children will become eligible each year.

That’s a lot of potential customers for the providers to take advantage of, so there’s good reason to be optimistic that the Junior ISAs will at least be competitive.

A great opportunity

I think that Junior ISAs look about as good as could have been expected. ISA providers are pretty excited (unsurprisingly) with all sorts of interesting predictions on just how much your child can expect to receive by the time they get access to their cash.

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For example, Hargreaves Lansdown highlighted that if you manage to get a 6% return on the cash, and save the full £3,000 contribution every year, then after charges, the balance could stand at around £95,730. Of course, the trick is finding a home paying such a return. It’s unlikely at the moment in terms of cash ISAs, unless base rate begins to climb, so you’ll be relying on the stock markets.

And while investing over the long time makes it far more likely that you will get a better return than putting your money in cash, it’s perfectly understandable that some parents will be reticent about risking the money in this way.

Far from perfect

However, there is a problem with the Junior ISA plans, and it is an obvious one, one we knew about all along. And that is that there are no contributions from the Government.

The idea of Child Trust Funds was to give parents a helping hand getting into saving for the sake of their children. The simple fact is that too many parents were not putting anything aside to help their offspring pay for University costs, buy a house, buy a car, etc. And it was the promise of a voucher from the Government to get that saving started that gave many parents the necessary kick up the backside.

I know why the Government has scrapped making contributions in this way, and it’s somewhat understandable, given the state of the British economy. But it’s naive in the extreme to think that enlarged contribution limits will counter the removal of the largest incentive towards saving for your children.

It would be lovely if the promise of tax-free savings in the form of a Junior ISA would serve as a similar motivation to new parents. But in my view it won’t, for precisely the same reason that not all adults make use of ISAs – they either don’t know about them, or understand how they work. And if they don’t make use of them with their own savings, why would they do so with their children’s?

The Government has a big selling job to do in order to convince parents to actually take advantage of Junior ISAs and ensure this is not a wasted opportunity.

More: Get a great cash ISA | How to pick the right life insurance policy | This tax-free account beats inflation