5 Common Myths Surrounding the Junior ISA
The Junior ISA
In the current economic environment it is vitally important that you know how to get the most from your savings and that you fully understand what options are available to you and your family. There has been some confusion surrounding the Junior ISA, which was introduced just over a year ago, and as a result a number of myths about it have developed. The Junior ISA is a tax efficient savings account that parents and other family members can use to save for their children. Parents can open an account on behalf of their child and can pay in up to £3,600 every year. When the child turns 18 the account and the money are passed over to them.
Myth 1: You can never pay in more than £3,600 a year
While it is true that in the year 2011/2012 parents and family members can only pay in £3,600 into a Junior ISA account, this is simply the tax-free threshold. You can pay in more but it would defeat the point of the JISA as a tax-efficient savings account as the extra you paid in would not be tax-free. The maximum limit is also unlikely to stay the same in years to come. The maximum tax-free limit will change in accordance with inflation. This means that the money you put in will not lose any value as inflation rates change. What you can put in one year will still be of equivalent value in the next year.
Myth 2: Your child can have several Junior ISAs
This myth may have developed in relation to adult ISAs. With an ISA you are able to open a number of accounts with different providers. However, this does not apply to the Junior ISA. You can only open one Junior ISA account per child, so you should choose your provider carefully. If you do decide that you do want to change providers you will have to move all the funds in the account across before you will be able to deposit any more money. You are, however, able to open both a Junior ISA account and a Junior Stocks and Shares ISA for your child. This can be a useful thing to do as it means that you can save money in one account and make investments that could make a profit in the other. The maximum limit of £3,600 will still apply; in order for the accounts to be tax-free you cannot deposit more than £3,600 in the accounts in total. Another option for your child is that when they turn 16 they can have a Junior ISA but can also open an adult ISA.
Myth 3: All children can have a Junior ISA
Unfortunately, if your child was born after 1st of September 2002 but before 1st January 2011 they are not eligible for a Junior ISA. This is down to the fact that in 2005 the government launched a scheme that is similar to the Junior ISA, the Child Trust Fund scheme. If your child was born between these dates they will fall under the CTF scheme and will not be able to open a Junior ISA. Even if you didn’t open a CTF account yourself, your child may still have one in their name as the government automatically opened accounts for a large number of children. This is because the government gave out incentives to try and encourage people to open Child Trust Fund accounts. These incentives were in the form of £250 vouchers that could be invested in CTF accounts. If parents did not invest the voucher into a CTF, the government automatically invested it for them.
Myth 4: You can convert your child’s CTF account into a JISA
Parents may think that they can simply change a CTF account into a JISA but this is not the case. If your child falls under the Child Trust Fund scheme they will not be able to change their account into a Junior ISA. This has caused some frustration amongst parents because the CTF scheme has quickly become outdated with many providers offering better interest rates for the newer Junior ISA option. Many CTFs are languishing and the rates of interest available have not changed with inflation, reducing their value for money.
Myth 5: Children have to be 18 before they can access their account
This myth is half true. Money cannot be withdrawn from the Junior ISA until your child has turned 18. Once they are 18 years old they will be able to take control of the account and do what they want with the money. Though the child will not be able to make withdrawals before then, they can manage the account and choose how to invest money when they turn 16. Parents and legal guardians can set up a Junior ISA account for a child but grandparents, other family members and family friends can all deposit money in the account. Depositing money into a Junior ISA can be useful for when family members want to give a child money on their birthday or at Christmas.