The rise of the Jisa shows no sign of abating as the emphasis on intergenerational wealth planning grows
The Junior Isa is gaining popularity with clients, with almost 15 per cent more plans subscribed to in 2017/18 than the previous year (see chart below). Part of this growth is down to the product’s flexibility to fit into financial plans where the aim is to cascade wealth down the generations.
A Jisa can only be set up by the person with parental responsibility for a child under 18 years of age. However, anyone can pay into the Jisa for the child – grandparents, parents, godparents – up to £4,260 in 2018/19 and £4,368 in 2019/20.
Like any other Isa, if the subscription level is not used up in a tax year, there is no opportunity to carry forward unused subscriptions.
That said, once the child is older, there is an opportunity to extend this subscription limit.
A child reaching 16 can also take out an “adult” cash Isa, meaning for two tax years they (or more probably someone on their behalf) can subscribe £24,368 across the two products. What is more, in the tax year a child turns 18, they can fulfil their Jisa allowance before their 18th birthday, then subscribe the full £20,000 to, say, a stocks and shares Isa in the remainder of the tax year.
Children can only have one cash-type Jisa and one stocks and shares Jisa. So if the parent wants to change Isa manager, the whole of the Jisa has to be transferred to the new contract – they can’t just start a new one and let the old Jisa linger on.
Jisas are an attractive option for parents wishing to invest for their children’s future, with income and gains from savings and investments in one exempt from income tax and capital gains tax.
The parental settlements legislation usually means a child’s income generated from funds derived from a parent (but not from a grandparent) is taxable on the parent, subject to a £100 a year de minimis. However, the income generated from subscriptions made by a parent into a Jisa is not taxable under these rules. By contrast, the parental settlements legislation does apply where parents pay into adult cash Isas for unmarried savers aged 16 or 17.
Grandparents may also choose to fund Jisas for their grandchildren. Any gifts outside the usual inheritance tax allowances, including the £3,000 annual allowance, will not be fully outside the estate for seven years after the date of the gift. But regular payments from surplus income are exempt.
The Jisa will transfer into the child’s name by the time they reach 18 at the latest.
They can request this change earlier; indeed, from their 16th birthday, they can inform the Isa manager they want to be the registered contact, and without getting permission from the existing registered contact (most likely their parent). However, at age 18, there will always be a change of “ownership” to the child.
At that time, the child is given the option to change the Jisa to an adult version, transfer elsewhere or withdraw some or the lot.
The worry that their child will just blow the whole fund on their 18th birthday could be the biggest mental hurdle for some parents. But I always feel this is doing the child a disservice.
At age 18, many will already be at or approaching university and will be aware of the financial constraints they are entering for the coming few years.
This nest egg could help them enormously, either by taking some of this financial pressure off or giving them the freedom to buy something else (material or experience) before they start counting the student loan.
Some parents choose not to tell their children about their Jisa until they are older but others use it as a training exercise, giving them valuable lessons in watching as the value of an investment rises and falls, and the factors that affect this movement.
The rise of the Jisa shows no sign of abating and its position as a key part of wealth planning for different generations looks assured.
Rachel Vahey is product technical manager at Nucleus