26 Apr 2011 | Ian Bruce

Don't Jump into a JISA 

The Junior ISA is due to launch this autumn and is commonly regarded as the replacement product for the Child Trust Fund (CTF). This tax-efficient way to invest for a child should be welcomed, but before parents or grandparents decide to invest, it would be wise to take a step back and look at the alternatives. A Junior ISA may not be the most appropriate, or cost effective, investment option for many.  

The Junior ISA is only available for children who are not eligible for the Child Trust Fund (born between 1 September 2002 and 1 September 2011) and are under 18 years old. Like a regular ISA, a Junior ISA will have a maximum investment limit, expected to be £3,000, but a child will be eligible to hold only one cash and stocks and shares account at any one time. Once money is invested in a Junior ISA, it is ‘locked in’ until the child turns 18.   

Parents will have to ensure their children have a sufficient financial education to take control of what could be a large investment portfolio. Recent research from the AIC revealed that an investment of £3,000 per year for the last 18 years in the average investment company, would have netted just over £120,000.  

Something that potential Junior ISA investors should consider is cost. A typical ISA wrapper can incur administration charges of around £30, which is normally passed on to the customer. This results in fees of at least 1% per annum for investors. Before investors are seduced by the tax-efficient tag of the Junior ISA, they ought to consider lower-cost alternatives that might save hundreds of pounds of management fees over the lifetime of the product. The underlying investments of these alternatives, in some cases, will be the same as those of the Junior ISA.  

Take for example investment trust children’s savings schemes such as the Baillie Gifford Children’s Savings Plan. It has no wrapper costs or dealing fees and there are no maximum investment restrictions*. The use of tax allowances or bare trusts can reduce tax liabilities, and the standard designated account option gives more control to parents and grandparents if required. This product can be held alongside other children’s investment products and it is available for all children under 18. For many investors this type of product may be a better option. More information about Baillie Gifford’s Children’s Savings Plan can be found at www.bgchildsavings.com.  

* Other charges include the dealing price spread, and stamp duty costs of 0.5% on purchases. The investment trusts also incur costs in managing and administering their portfolios (including dealing costs).

Please remember that, as with all stock market investments, the value of your investment can go down as well as up and you may not get back the amount originally invested. You also should note that tax rates and reliefs may change at any time and their value depends on your circumstances.

The views that are expressed in this BG Log should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment.
This BG Log contains information and opinion on investments that does not constitute independent investment research and is, therefore, not subject to the protections afforded to independent research.