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Are the kids’ Isas all right?

Chris Salih reports that investment industry opinion is divided over the introduction of junior Isas

The financial services industry is split over whether junior Isas will be a useful tool for investing for children.

The Government says it will work closely with stakeholders to formulate the structure of the accounts, which are set to be available by the autumn of 2011. The junior Isa is set to have similar characteristics to a child trust fund but will not have the Government contributions.

Funds will be placed in an account which will remain locked until the child reaches adulthood. As with traditional Isas, annual contributions will be capped.
In May, the Government said it would reduce and then stop CTFs as part of plans to save £6.2bn this financial year. Under the CTF, parents received a minimum £250 voucher for newborns, with access for the child from the age of 18. A further payment was made at the age of seven.

These payments were reduced in August and will stop in January 2011. This will save the Government £320m this year and £500m in future years.

Fidelity welcomes junior Isas, suggesting the current investment rules for children can be complex in terms of the amount and type of investment as well as who can make the investment on behalf of the child. The firm says there are potential tax issues for the donor and relatively few products which are simple and tax-advantaged.

Fidelity Investment Managers UK managing director Gary Shaughnessy says: “This is a really positive move which endorses the idea of saving, particularly regular saving, from as early an age as possible. Isas are well understood and liked by savers – they work, so it makes sense to build on them.

“We are seeing respon-sibility moving increasingly from the state and employers to individuals when it comes to saving, so a move towards whole-of-life saving, connecting children’s Isas, Isas and eventually pensions must be our aim.”

Chelsea Financial Services managing director Darius McDermott says saving at the earliest stage possible makes sense.

He says: “It is proven that investing in equity markets over 40 to 50 years will be beneficial and this not only offers a decent pot for university but for all hurdles in life. Parents and grandparents will initially be paying sums into these junior Isas but it will get children interested in money from an early stage.”

But Baillie Gifford marketing director of wealth management James Budden believes the Government is introducing junior Isas almost as a peace offering for firms whose business model depended on CTFs. He says junior Isas do not offer investors much more than is already available through investment trust saving schemes.

He says: “Bare trusts and use of personal allowances currently mitigate most, if not all, tax liability within investment trust schemes. No doubt, the children’s Isa will come with limits on contributions which you would not find attached to other products and I guess they will be lower than the real thing. Again, people can already use the ordinary Isa route to save for children. The key to the CTF was the Government contribution, and, with that removed, I fear this is an olive branch to appease the lobbyists.”

Fidelity is calling for the Government to allow accounts for those born before the advent of CTFs as well as those born after January 2011, freedom from inheritance tax if the donor dies less than seven years after the gift, the ability to switch and allowing the investor to stay invested in the Isa until required to promote the “whole of life approach”.

Informed Choice managing director Martin Bamford says the perfect solution would be for the junior Isa to match the adult Isa but he considers that is unlikely.
He says: “I think the only real difference will be the lack of a Government donation, so encouraging saving in these product may not be as simple as they may hope. It may offer a boost to more specialist products that will benefit in the longer term as assets are locked in.”

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  1. Why complicate matters and waste time and more money by formulating a new junior ISA account. Just use the CTF and amend the rules to accommodate the new proposals! Or is that just too simple?

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