Government Announces 'Junior ISA'

The government announced this week that it would create a tax-free children's savings account to provide parents with a simple and cost-effective way to save for their child's future.  Described as a 'Junior ISA', the new account will be available to families by next autumn.

The government announced in May 2010 that it would phase out Child Trust Funds (CTFs), as part of a government-wide cost-cutting plan to tackle the deficit.  The Child Trust Funds were a special savings and investment account range brought in by the previous government whereby a child born on or after the 1st September 2002 would receive a £250 voucher when an account was opened in their name. 

A further £250 voucher is available to children of families on a lower income.  Any income or gains from the account are tax-free.  The closing of eligibility to the Child Trust Fund scheme in January 2011 will save the Treasury £320 million this year and £500 million in each future year. 

Even though saving initiatives put paid to the CTF, the government has listened to feedback and acknowledged that there is still a huge need for an opportunity for parents to start paying into a savings scheme from their child's birth onwards.  The new 'Junior ISA' will have both cash and stocks and shares options available, as with a standard adult Individual Savings Account

Funds that are added to the account will be owned by the child named on the account and will be locked away until the child reaches adulthood.  Contributions to the account will be capped, and all returns that are earned will be tax-free.  Unlike the CTF scheme, no government contributions will be made to the accounts, as the benefits will come purely from the tax savings.

Mark Hoban, Financial Secretary to the Treasury said: "I am committed to ensuring that all parents can save for their children's future in a simple and straightforward account. The introduction of this new account means that we can still offer people a clear way of saving for their children, while saving the half billion pounds a year that we currently spend on Child Trust Funds".

Reactions to the scheme have been generally positive, although there has been questioning from some quarters.  John Reeve, Chief Executive of Family Investments said, "The Government is calling this new product a "Junior ISA" but in essence it appears to be a CTF without the contribution, which begs the question as to why the CTF is not kept but without the voucher?"

Reeve continues, "Unfortunately, the timetable announced by the Government also means that there will be at least a six-month gap between the end of the CTF and the Junior ISA's introduction."   The Treasury announcement does confirm however, that eligibility for the new scheme will be backdated to ensure that no child born after the closure of Child Trust Funds will lose out.

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