Many parents like to save up a lump sum for when their children turn 18, to help towards university fees, buying a first car, or even getting a foot on the property ladder.
Until the start of 2011, this was possible through a Child Trust Fund: a long-term savings and investment account that the government kick-started with a voucher worth up to £250. The account could be topped up to provide a lump sum for their children when they reach 18.
But in 2011, the government scrapped this scheme and introduced a new way to save for your children: The Junior Individual Savings Account or Junior ISA.
Newborns and children who missed out on the Child Trust Fund should be eligible for a Junior ISA - and there are many similarities between the two.
Although you won’t receive a contribution from the government, the good news is that the Junior ISA’s annual limit is higher
…and the limits of existing Child Trust Funds have been brought into line to match it… Plus from 2013 the limits for both Junior ISAs and Child Trust Funds will increase annually.
However, you’ll have some comparing to do, because providers now have more say in the minimum payments and charges they apply than they did with the Child Trust Fund.
And because you wont receive a voucher from the government for Junior ISAs, you’ll need to remember to set an account up yourself.
You can choose to save for your children in a cash or stocks and shares Junior ISA or a combination of both up to a total limit of £3600.
Plus, you can invest a further £3,600 in each new tax year and from April 2013 this limit will increase annually in line with the Consumer Price Index.
Unlike adult ISAs your children can’t have a new Junior ISA in each tax year with different providers. But you can move to different providers whenever you want.
If you’re unsure which option to go for, consider this: History so far has shown that for every 18-year period in the past 50 years, stocks and shares have outperformed cash.*
Bear in mind though that past performance isn’t a guide to future performance. And whilst stocks and shares carry more risk as their values tend to rise and fall, meaning the child could get back less than is paid in, cash is usually safer but offers less potential for higher returns.
And here’s another handy tip the sooner you start to invest the bigger the potential rewards.
Of course money can be tight for new parents, but starting to save even a small monthly amount when they’re young could result in nice lump sum over 18 years… and you can always ask your friends and family to chip in!
So. With the new Junior ISA, saving for your children is straightforward and a great way to give them a head start in life and provide a helping hand for the future.
* Source: Barclays equity gilt study February 2011. Average annual real rate of return based on Barclays indices.