Give your kids a nicer Jisa
Individual savings accounts are a staple part of many adults' savings and investment strategies, but since November 2011 parents have been able to use Junior Isas (Jisas) to give their kids a financial head start.
Jisas offer the same tax breaks as the fully grown version, and Toby Alcock, senior client partner at wealth adviser Towry, says it's definitely worth taking one out for your child.
'They're a great way to teach children about money and build up long-term savings tax-efficiently, for anything from university fees to a house deposit,' he explains. 'If you're happy to tie the money up until the child reaches 18, then Jisas should definitely be your first consideration for their savings.'
Anyone aged under 18 who lives in the UK can have a Jisa. The only exceptions are children born between 1 September 2002 and 2 January 2011 who qualified for child trust funds (CTFs), the forerunners to Jisas.
How it works
Jisas can be opened by parents or legal guardians, although once they turn 16, children can open their own account if they like. Anyone can pay into a child's Jisa, but the total amount paid in must not exceed the annual allowance - £3,720 in the 2013/14 tax year. This annual allowance increases in line with inflation and will rise to £3,840 next tax year.
A particularly compelling feature of Jisas is the tax treatment. On a cash Jisa interest is paid tax-free, while on a stocks and shares Jisa there is no tax to pay on dividends paid out by holdings or on capital gains. In addition, Jisas are exempt from a tax rule that can hit parents who put money away in their child's name.
Anna Bowes, director at Savings Champion, explains: 'To stop parents reducing their tax bill by putting their own money in their child's name, if the interest on money a child receives from their parent exceeds £100, all of it will be taxed as if it were the parent's. But this doesn't apply to money saved into Jisas, so a parent could use this for their child's savings without having to worry about how much interest is generated.'
Whatever is paid into a Jisa, plus any interest or income it earns, cannot be taken out until the child reaches age 18. This can be both a benefit and a disadvantage, as Bowes explains.
'Not being able to access the money might be a downside if there's an emergency and you need some cash, but it also means the money isn't touched until the child reaches 18 and can spend it on something meaningful, such as university, a car or travel.'
It's also important to note that as soon as the child turns 18, any Jisas they have will mature into adult ISAs and they will have the option of taking the money out. Again this can have pros and cons.
'At 18 there's no guarantee a child will have the financial maturity to spend the money as you intended. It can be a bit of a cliff edge,' says Alcock.
'Most of our clients are comfortable their children will be mature enough to spend it sensibly but, if you are concerned, you could always limit the amount that's paid into your son or daughter's Jisa and keep other savings for their future in your own name.'
Mirroring the adult version, there are two types of Jisa - cash, and stocks and shares. The cash version is a form of savings account, with interest added to the account on a regular basis. These are offered by the banks and building societies and have many of the features of a standard savings account.
Kate Moore, head of savings and investments at Family Investments, explains: 'There are often attractive introductory rates available on cash Jisas, but they can vary and may only be supported for a limited time. As a result, parents need to review the account regularly to be sure they're getting the best rate available.'
Stocks and shares Jisas invest in the stock market. These can be taken out through fund management groups, friendly societies, discount brokers or stockbrokers. Plenty of choice is available.
While it's possible to plump for a simple index-tracking fund, you could build your Jisa portfolio through one of the platforms. For example Charles Stanley offers Jisa investors exactly the same range of investments as are available to Isa investors, including shares, investment trusts, unit trusts, bonds and exchange traded funds.
As well as providing choice, holding a Jisa on a platform also means you can mix and match the investments you hold. In comparison, if you went directly to a fund management company you would be restricted to their range of investments
A child can have just one type of Jisa, or you can spread their annual allowance across the two types. There are no rules on how much must be allocated to each.
Where you put your child's money is entirely up to you, but figures from HM Revenue & Customs for the 2012/13 tax year show that while £293 million went into cash Jisas, stocks and shares Jisas received just £99 million.
Rob Morgan, pension and investment analyst at Charles Stanley, believes parents are missing a trick by sticking with cash.
'Over 18 years there's ample time to ride out the peaks and troughs of the stock market,' he says. 'If you stick with cash, there's a risk that the value of your money will be eroded by inflation.'
Changing your mind is also less of an issue with Jisas than grown-up Isas, as there's greater flexibility around moving between the two types.
Adults can only shift their cash Isas into stocks and shares Isas (not vice versa), whereas children can move between the two whenever they like. Moreover, while it's possible for Isa investors to inadvertently lose some of their Isa allowance by withdrawing money rather than transferring it, this can't happen with a Jisa.
As the money's locked away until the child's 18, the only way to move it between providers is by transferring it. The only requirement when transferring to a different provider of the same type of Jisa (cash or stocks and shares) is that you must move all your money. This is because you can only have a maximum of one cash Jisa and one stocks and shares Jisa at any time.
Switch from child trust funds to Junior Isas
When the government launched Jisas in November 2011, some six million children who had already received child trust funds were effectively left on the sidelines.
'Children with CTFs can save exactly the same amount each year as their brothers and sisters with Jisas, but as there are never going to be any new CTF customers, it's become a bit of a zombie product,' explains Anna Bowes, director at Savings Champion.
As well as having less choice of product, kids with CTFs can also suffer financially.
Charges on stocks and shares CTFs can be higher, while the interest rates on cash CTFs are often lower than those on cash Jisas. But after much lobbying from parents and the financial services industry, this is set to change.
Last December, the government announced that from April 2015 it would allow parents to transfer a child's CTF into a Jisa.
It's still working on the mechanics of the transfer, but Bowes has the following advice for those parents nursing their child's CTF: 'The prospect of higher interest rates and lower charges might make you feel like doing nothing until 2015, but do keep taking advantage of the annual allowance,' she says. 'Anything you pay in will grow tax-efficiently and could make a big difference to your child's future.'