Junior ISA as an Investment compared to the Child Trust Fund

From November 2011, the government of the United Kingdom will introduce its new tax free investment scheme called the Junior ISA. The scheme is a replacement for the Child Trust Fund.

Children born between 1^st September 2002 and 2^nd January 2011 may be eligible for a Child Trust Fund. Additionally, the child must have been paid Child Benefit at least for one day before 4^th January 2011, and be a resident of the UK and free from any immigration restrictions, to qualify for the Child Trust Fund.

Depending on when the child was born, a Child Trust Fund voucher between £50 and £250 will be sent by the HM Revenues & Customs. The voucher can be used to open a Child Trust Fund in the name of the child, from a selection of providers. Money in the Child Trust Fund account belongs to the child and can not be withdrawn until the child is 18. Parents, family and friends can top up the account by up to £1200 per year.

A Junior ISA has some significant differences compared to the Child Trust Fund. The government will not make a contribution to the Junior ISA. It is organised in a similar way to a standard ISA, which is available for anyone over the age of 16. The biggest flexibility a Junior ISA offers is its range of investment choices.

A maximum of £3600 per year can be invested in a Junior ISA. The account must be held in the child’s name, similar to a Child Trust Fund. A Junior ISA must be managed by a parent or guardian, but contributions can be made by anyone who wishes to do so.

Money can not be withdrawn from a Junior ISA until the child is 18, when it will be converted to a standard ISA. The management of the Junior ISA can be transferred to the child after the age of 16. A Junior ISA enjoys the same benefits as a standard ISA. No capital gains tax is to be paid and the income from the investment is not taxable. It should be noted that the tax rules can change and is likely to be different based on individual circumstances. A professional tax adviser should be consulted for individual tax advice.

If your child was born before 1^st September 2002 or after 3^rd January 2011, he or she may be eligible for a Junior ISA. If a child was born between 1^st September 2002 and 3^rd January 2011, but not eligible for a Child Trust Fund, then they are likely to be eligible for a Junior ISA. You can not open a Child Trust Fund and a Junior ISA for the same child.

Two types of Junior ISA exist depending on your investment objectives. A Cash Junior ISA and a Stocks and Shares Junior ISA are available. An individual child can hold up to one of each type of Junior ISA. Money can be transferred between the two Junior ISAs and can also be transferred from provider to provider. It should also be noted that investments in a Stocks & Shares Junior ISA can fall in value as well as rise and therefore you can get back less than you invested.

Junior ISA also provides a more commercial model for investment companies with a variety of investment choices available. This is likely to lead to heavy competition between providers for your custom. So be sure to look around for the best deal.

This guide is provided for general information only and should not be used solely for making your decisions on investments. An appropriate financial provider or professional adviser should be consulted for advice before making any financial decisions.