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Junior ISAs

It’s just a few months until junior ISAs go on sale. It’s the new tax-free savings account for children who don’t already have a child trust fund. The government says that parents/friends and others will be able to pay up to £3,600 into a junior ISA between them every year. The good news is that the annual limits on child trust funds are also increasing from £1,200 a year to £3,600. But - at the moment - there's no sign that children will be able to transfer money from a child trust fund into a junior ISA.

How the Junior ISA should work
Many children under the age of 18 will be able to have a Junior ISA. The only exception is those who already have a child trust fund. Children under the age of 16 will have to get their parent or carer to open it for them, but children aged 16 or over can open a junior ISA for themselves.

If your child has a child trust fund you won’t be able to transfer money from the CTF to a junior ISA or vice versa. However, parents/children will be able to transfer money from one junior ISA to another. The government may change its mind on transfers between child trust funds and junior ISAs but we won’t know until later this summer.

You’ll be able to pay in up to £3,600 a year overall into a junior ISA, either in a cash account, a stocks and shares ISA or split between the two. And the junior ISA limit will rise by the consumer prices index every year from April 2013 onwards.

Payouts at 18
Money in the junior ISA will be locked away until the child reaches 18. However, children will be able to take over the running of their junior ISA when they reach 16.

The rules let children aged 16 and over open an ordinary cash ISA, although they have to be aged 18 or over before they can open a stocks and shares ISA. The government is proposing that children aged 16 or over will be able to have an ‘adult’ cash ISA and a junior ISA, and the £3,600 a year that can be paid into the junior ISA won’t affect their ‘adult’ ISA limits.

Tax free returns
The returns will be tax free which means your child won’t pay any tax on the interest from a cash junior ISA, and neither will there be extra tax to pay when your child cashes in a stocks and shares junior ISA.

Many parents think that children’s ordinary savings accounts are tax free but it’s not that straightforward. Although children are unlikely to pay tax on their savings because they have their own personal tax allowance (currently £7,475 a year), interest is normally paid with tax already having been taken off. Plus if parents pay money into an ordinary savings account for their child, they are treated as though it’s their money (and taxed on the proceeds) if the account generates more than £100 in interest every year from the amount they’ve paid in.

If you have a child trust fund
If you have money in a child trust fund you won’t be able to transfer it to a junior ISA without a change in the rules. In the meantime, make sure you’re getting the best rate on cash child trust funds. Some of the best paying accounts will let you transfer money in.

Uploaded July 2011

Sarah Pannells

SavvyWoman is the brainchild of Sarah Pennells, who's a well known personal finance journalist and broadcaster. Sarah has appeared regularly on BBC Saturday Breakfast and writes for several magazines. (photo: Simon Brown)

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