There are plenty of stories about graduates leaving university saddled with debts that run into tens of thousands.
Saving into a Junior Isa in anticipation of these types of education fees may seem like a good idea.
The annual Junior Isa allowance is £4,260 and, like an adult Isa, parents can either open a cash Jisa or a stocks and shares Jisa.
Adrian Lowcock, head of personal investing at Willis Owen, points out the main advantage of the Junior Isa is it allows parents to begin saving and investing for their child right away.
Income or investment returns generated by a Junior Isa do not count towards a child's tax allowance – effectively any income or capital gains can roll up tax-free.Adrian Lowcock“This allows parents to lay the foundations for their child’s financial future by granting long-term tax-free savings or investments,” he says.
“Previously, if a parent invested or saved money for their child, any interest earned on savings above £100 would be taxed under the parents’ allowances, capital gains and dividends would also fall under the parents’ tax wrapper, unless the investment was made in a more complex trust.
“Income or investment returns generated by a Junior Isa do not count towards a child's tax allowance – effectively any income or capital gains can roll up tax-free.”
Kay Ingram, director of public policy at LEBC Group, agrees the Jisa is a tax-efficient way of passing money onto children – “especially if the parent has already used their own adult Isa allowance of £20,000 per tax year”.
She explains: “Any money saved by a parent on behalf of their minor child is usually taxed as their own income, apart from the first £100, so the tax exemption for income and growth on Jisas is helpful where parents have no tax-free savings allowances of their own and would otherwise be taxed on the savings.”
Encouraging contributions
Another advantage of opening a Junior Isa for your child is that other family members or friends can make contributions into it.
Rather than asking for the latest toy or video game from relatives, parents could encourage a financial contribution to their child’s future.
Myles Edwards, membership director of Foresters Friendly Society, points out the generous annual Junior Isa allowance means “a family can save a sizeable sum for a loved one when they reach 18 and may be off to university”.
Any parents taking out a Junior Isa should be aware that the child can take control of the account when they turn 16 and then start withdrawing money from the age of 18.
This is also one of the potential disadvantages of the Junior Isa – ultimately, it is up to the child how they spend those funds.
When their parents opened they Isa, they may have had in mind all the money saved into it would pay for university. But when their child turns 18, they may have other ideas.
Certainly, they may decide they do not want to go onto any form of further education.
Ms Ingram acknowledges: “The big drawback with Jisas is that from the age of 16 the child is automatically made aware of its existence; the child has the absolute right to take control of the Jisa from age 18.
“They may cash the fund in, add to it or alter the investments held. Parents automatically lose control of the investment.”
She adds: “Parents may be concerned that at the age of 16, the child may make plans to spend the funds – and from the age of 18 parents can no longer stop them doing so.”
Chris Justham, relationship manager at Seven Investment Management (7IM), puts it more bluntly.
“You might have it earmarked for university funding or a house deposit, they might prefer a holiday in Barbados and a fast car,” he says.
Sensible spending
How can parents ensure their child uses the money saved sensibly when they have control over it at 18?
“Educating children on finance and getting them engaged in the decision-making about how it’s invested early on will help them make better decisions later on,” Mr Justham suggests.
Mr Lowcock agrees the Junior Isa can be used as an opportunity to engage with and education children on the importance of long-term saving and investing.
Paul Osborn, chief executive of Foresters Friendly Society, suggests parents work with their children to provide an understanding of money from a young age.
"This could be as simple as helping children to understand the value of pocket money and the approach of spend some, save some, as well as an understanding of saving for the important milestones in life," he notes.
If parents are unsure about opening a Junior Isa for this reason, is the alternative that they set up their own Isa and hand over the money when their child turns 18, or at any age they feel is appropriate?
Jake Wombwell-Povey, chief executive of Goji Investments, explains: “From a financial planning point of view, it makes sense to maintain some flexibility and, while Isas remain in parents' names, parents can use the money whenever they want for whatever they want and that might certainly be appealing.
“It's also worth bearing in mind that parents might want to use their own allowances (£20,000 per year) and then start investing in their child's Junior Isa, which has a lower limit of £4,260.”
He continues: “Clearly, for a two-parent household to be able to optimise their annual pension allowances, and maximise their joint Isa allowance, and still have funds left over for a Junior Isa, then we are likely to be talking about much wealthier households than the average.”
Keeping control
Ms Ingram says: “Working parents who are taxpayers and who have not used up their own Isa allowance may also consider saving in an Isa in their own name, later gifting some of this tax-free money to their children.
“This leaves the parent in full control of how and when the money is invested, gifted and spent. Grandparents could choose to do the same.”
But she cautions: “The only disadvantage with this approach is that making a gift later means it stays in the estate of the donor for inheritance tax purposes for longer.
“Capital gifts do not fall out of the estate until a full seven years after the date of the gift. Regular payments made from surplus income are automatically exempt.
“So, gifting the income from the investment on a regular basis and limiting capital to the £3,000 exempt annual allowance would overcome this disadvantage too.”
However, while parents might think they are disciplined enough not to touch the funds they had set aside for their children, if these are in their own Isa, there may be a temptation to dip into them.
“I think it’s best to hold the money irrevocably in your child’s name,” says Mr Justham.
“It ensures there is discipline to the process and stops you dipping into it. It also reassures friends and other family members who may wish to make a contribution that the money will be ring-fenced and used for what it is intended.
“By putting money into Jisas, friends and family know it will be for the child alone.”
eleanor.duncan@ft.com
