Watching the children in our lives grow up can be a rollercoaster ride. Whether it’s drying their tears, encouraging their studies, or providing financial and emotional support for one or more of life’s key milestones we do what we can to give them the best possible start in life.
Of course, money isn’t everything but it can help to give the children in our lives a head start. And the simple fact of the matter is that the financial world our children are growing up in is a very different and difficult one. If saving for our children was once perhaps an aspiration, it is increasingly becoming a necessity if we want them to have the best possible start to their adult lives.
The increasing cost of university education continues to grab the headlines and presents a real challenge and it has been widely reported that the number of universities planning to charge the maximum £9,000 a year for tuition fees from 2012 is far greater than anticipated. With the average annual cost of tuition fees now expected to reach £8,400 (source: thecompleteuniversityguide.co.uk, July 2011), the National Union of Students estimates that those who choose higher education will graduate with debts in excess of £41,000.
And the financial challenges keep coming for the younger generation. According to a recent report, the average cost of a deposit on a house for a first-time buyer is now over £30,000 and, unsurprisingly, the average age for a first-time buyer is now 37 (source: Council of Mortgage Lenders, February 2011). That isn’t an appealing prospect for children or their parents!
Without a helping hand, your children’s hopes and dreams may remain just that; but with sensible financial planning you can help make them a reality.
From 1 November the government’s new Junior Individual Savings Account (Junior ISA) is open for business; a tax-efficient savings vehicle aimed to provide parents, grandparents, friends and relatives with the opportunity and encouragement to build a capital sum for the benefit of their loved ones. The Junior ISA initiative is set to benefit an estimated six million youngsters who are eligible immediately and a further 800,000 children born each year in the UK (source: Office for National Statistics, August 2011). It should be noted that the favourable tax treatment of Junior ISAs may not be maintained in the future and is subject to changes in legislation.
The Junior ISA will be available to all UK-resident children under the age of 18 who do not have a Child Trust Fund (CTF). The CTF was a similar child-focused savings initiative introduced by the previous Labour government, which was withdrawn earlier this year – another victim of spending cut-backs. The rules and regulations governing Junior ISAs are based on those for a standard ISA.
Both stocks and shares Junior ISAs and cash Junior ISAs will be available and children will be able to hold one of each account at a time. Both the cash Junior ISAs and stocks and shares Junior ISAs can be with different providers but it is not possible to have more than one provider for each Junior ISA account. The maximum annual contribution limit (combined across both accounts) will be £3,600, which will be increased in line with inflation each year from April 2013. Junior ISAs will also benefit from the same tax advantages – tax-free interest on cash deposits, no further liability to income tax on dividends and no capital gains tax. Significantly, the Junior ISA accounts will be owned by the child but the funds will be locked in until the child turns 18. Rather than pay out at that point, Junior ISAs will roll over into standard ISAs, hopefully encouraging the same saving discipline into the future.
One quirk of the regulations means that for children aged 16 and 17, there is the opportunity to invest in both a Junior ISA and a standard cash ISA in the same tax year. So, potentially, it will be possible to shelter a total of £8,940 in the current tax year – £3,600 in a Junior ISA and £5,340 in a standard cash ISA.
Children born between 1 September 2002 and 2 January 2011 will retain their existing CTF accounts but will not be eligible to invest in a Junior ISA. However, to help level the playing field, the annual contribution limits will be increased and brought into line with the Junior ISA allowance.
The government-set contribution limits are intended to encourage all families to save for their children’s future, although the relatively low annual limit may still prove beyond the means of many parents, particularly in these austere times.
But help is potentially at hand. Whilst a Junior ISA has to be set up by a parent or guardian, the rules allow contributions from any source. It is often grandparents who are in a position to lead the way in saving for children, possibly as part of their own plans to mitigate inheritance tax. And it should also be remembered that other relatives, godparents and family friends can also make a donation towards this valuable allowance.
Junior ISAs, clearly, have a number of valuable tax advantages but they are by no means the only solution for saving on behalf of your children. For larger sums, or to retain a greater level of control, the use of trusts provides greater flexibility whilst still offering the potential to make significant tax savings.
However you want to invest, you need to choose a simple, flexible solution that gives you every chance of success in providing that vital helping hand to your children in the future.