Junior Isas were launched on 1 November 2011 with the aim of providing parents with a simple way to save for their children’s future.
They have been perceived by many as a replacement for child trust funds.
While this is true in many respects, important differences exist between the products. Perhaps most importantly for children who remain eligible for CTFs, at the present time, the Junior Isa door remains closed for them.
Unless the government responds to lobbying for change, it will not be possible for a CTF eligible child to open a Junior Isa. In practical terms, this means that a Junior Isa cannot be opened for almost any child born between 1 September 2002 and 2 January 2011.
So what are the differences between CTFs and Junior Isas?
An obvious place to start is with the level of government assistance provided. At the point CTFs were closed to newborn children, each child was given a voucher at birth for either £250 or £500 depending on their family circumstances with the promise of a further voucher at the child’s seventh birthday. The position is simpler with Junior Isas but unfortunately a lot less generous on the subscription front. The government does not provide any monetary incentive although the incentive of tax-free capital growth and investment income remains.
While the government has said it will not be adding any money to a Junior Isa it has loosened the restraints on the amount of money which can be paid in for the child. The old CTF limit of £1200 a year has been replaced with a limit of £3600 a year for Junior Isas. This annual limit will also be increased each tax year in line with CPI. To counter accusations that the lower CTF limit would be unfair to some children, the government has also announced an increase to £3600 to match the Junior Isa position.
Looking at the available investment structures, the three types of CTF – savings, stakeholder and shares – have been consolidated into the same two options used for adult Isas – cash and stocks and shares. Investment restrictions have also been matched to those applying to adult Isas.
If we start with the opening of the Junior Isa, the first thing to note is that this can only be done by someone with parental responsibility for the child. This differs from Junior Sipps, which have been a popular option with grandparents for some time. While there is nothing stopping grandparents from paying money into a Junior Isa, they are not able to open the Junior Isa, this must be done by the parents or guardians.
Once the parent or guardian has opened the Junior Isa they become what is known as the registered contact. This involves managing the account until the child reaches 18, or 16 if the child decides to manage the Junior Isa themselves.
It is possible to change the registered contact at any time, but there can only be one person performing this role and, until the child reaches 16, the registered contact must always be a person with parental responsibility for the child.
Track
As hinted above, money can be paid into the Junior Isa by any person, subject to the annual limit of £3600. This limit applies across both types of Junior Isa, meaning £3600 can be paid into a cash Junior Isa or £3600 can be paid into a stocks and shares Junior Isa, or anywhere in between.
A cash Junior Isa and a stocks and shares Junior Isa can both be held for the child at the same time, but only one of each type may be held.
This makes it particularly important to keep a track of the rate of interest being offered on a cash Junior Isa.
If the rate drops then it is not possible to subscribe to another cash Junior Isa and deal with the transfer of the existing cash Junior Isa at your leisure, the transfer must be completed first to avoid breaching the rule regarding holding two Junior Isas of the same type at the same time.
Junior Isas differ slightly from adult Isas in the flexibility to transfer from either the cash product to the stocks and shares product or vice versa. Rules prohibit adult stocks and shares Isas being transferred to cash Isas but there is no restriction on this with Junior Isas.
Once funds are in a Junior Isa they are pretty much locked away until the child reaches 18. The child can choose to take control of the account at 16 but, except in the case of terminal illness or death, the funds cannot be withdrawn until the child’s 18th birthday.
The fact that the child has the ability to do as they wish with funds in a Junior Isa at age 18 has been viewed as a weakness of the product by some commentators. Concerns that the carefully laid plans of the family for the funds to be used to pay for university fees or a deposit on a first home will be blown away as the child squanders the windfall on a summer partying in Ibiza need to be considered.
They are perhaps best addressed by financial education as the date upon which the money becomes available approaches.
How has the market taken to Junior Isas?
Well, several offerings in the direct to client market have been quick to launch but it is fair to say that developments have been slower in the adviser market. What are the main reasons for this?
First, it is an unfortunate fact that the Junior Isa has been launched smack bang in the middle of the lead-up to the retail distribution review. The development teams of many platforms and providers are focusing on being RDR-ready and resources are only likely to be diverted where there is a feeling that there will be a significant return on the work undertaken.
This is where the other main issue arises. The annual subscription limit of £3600 is reasonable but it is not going to get the adrenalin flowing when it comes to providers who are focused on increasing assets under management. Couple this with a huge swathe of children not being eligible to open a Junior Isa and you get a taste for why the market has been slow to develop.
Given this, it has not been surprising to see a great deal of support for a change in the rule which prohibits transfers from CTFs. Most CTFs will not be huge in size but allowing the funds to be transferred, and CTF-eligible children to open Junior Isas will significantly expand the potential market. It will also help to allay concerns that the closure of CTFs to new entrants will lead to financial discrimination within families, with the Junior Isa eligible child having access to wider funds ranges and better interest rates than the child who is eligible for the “zombie” CTF.
Adviser platforms will no doubt be taking an interest in how the new kid on the block performs this Isa season.
Gareth James is technical marketing manager of AJ Bell
