The Sack Race Gets Under Way
Posted on:
22
Nov
2011
by Alex
Junior ISAs are going to revolutionise the way we save for our children, says Emma-Lou Montgomery, Maybe.
Well, they’ve fired the starter’s popgun now, and the early contenders are lurching their way up the first straight of an 18-lap race. It’s a neck-and-neck struggle for what might easily turn out to be a juicy £100,000 worth of investment for each child. And oh dear, there are already a few rather surprising gaps in the field, with several of the favourites simply deciding not to enter. Plus a lot of spectators who seem to be looking somewhere else at the moment. Can we attract their attention?
Later, perhaps – but maybe now’s not the best moment to try and sell funds? As we all know, the Junior ISA has been available since 1st November to any children under the age of 18 who did not qualify for the Child Trust Fund (either because they were born before CTF’s came into force in September 2002, or because they have been born since CTFs closed to new business on 1 January this year.) Government figures suggest that makes about 6 million children eligible immediately. Mmmm, tempting.
Their Future in Your Hands
First, a few basics. The Junior ISA works in pretty much the same way as the adult version, with a few exceptions. Each eligible child can hold one cash and one stocks and shares ISA. There are no limits as to how much can be held in each, as long as no more than £3,600 in total is saved per tax year.
That £3,600 a year limit will apply until 5 April 2013, and then the contribution limit will be updated annually in line with the Consumer Price Index. (That’s a slightly anomalous decision, by the way, since adult ISAs are due to switch from CPI indexation to the broader Retail Price Index next year.) As with adult ISAs too, Junior ISA holders are free to move their savings and investments from one provider to another. However, unlike adults, they cannot use a new ISA provider each year, Junior ISA holders can only be with one provider at any time.
Under 16s need a parent or guardian to open the account for them, and the adult retains control of the ISA until the child reaches 16. Control can then be handed over to the child, or retained by the adult. Over 16s, however, are free to open their own accounts and retain control of their ISAs throughout. Either way, no money can be withdrawn until the child reaches the age of 18. At that point the Junior ISA becomes an adult ISA, and the fund can be rolled straight into the new vehicle without needing to realise any capital gains.
Having a Junior ISA doesn’t preclude that same child from opening an additional adult cash ISA at the age of 16, however, just as the child can now. And it doesn’t impact on their adult ISA allowance either. Holders of a Junior ISA will be eligible to open a full adult ISA at the age of 18, just as they can at present. In terms of regulation, simplified die diligence applies for Junior ISAs, and they are also subject to MiFID rules, just like their adult counterparts.
“The major banks have shunned the launch of Junior ISAs.”
None of the big six (Barclays, Halifax/Bank of Scotland, HSBC, Lloyds TSB, Natwest/RBS and Santander) plan to have a Junior ISA in place for the launch date on 1 November. Nationwide Building Society is the only major player that plans to have a product then.
Unlike with CTFs, as we know, the Government won’t be making any £250 contributions at launch to each eligible child, or any other payments in later years. Times are hard. So what can investors expect from the Junior ISA?
Well, it depends. As long as a provider’s Junior ISA satisfies the overall criteria as stated already, it can set its own fees and create any age-eligibility criteria of its choosing. (Some Junior ISAs will only be available only to children under 16.) Providers are also free to set their own minimum investment levels. But the government has said that it will keep a close eye on any minimum contribution requirements in order to ensure that Junior ISAs don’t exclude people in any one income bracket.
CTFs: Gone But Not Forgotten
A child who already has a CTF in his or her name is not eligible for a Junior ISA, and the two cannot be amalgamated. However, the government has also said that once Junior ISAs are fully up-and-running it might consider aligning the two types of investment more closely. In the meantime, CTF holders can be reassured that they have not been left out altogether: they have also seen their annual contribution limit raised to £3,600 a year as of 1 November. (From 6 April 2013 that will also rise in line with Junior ISAs – or in other words, the annual contribution limit will follow the CPI.)
Some Odd Gaps In The Line-Up
So what’s on offer, as the Junior ISA approaches its debut? Well, not as much as you’d expect, frankly. There’s a decent smattering of types, with everything from ‘green’ funds to Shariah compliant ones. But the reticence of the high street banks to be specific has been notable right up to the last minute. By mid-October only Nationwide had properly announced the details of its Junior ISA. And rather disappointingly, it was only a cash ISA; the bank says there are no immediate plans to launch a stocks and shares version.
While Catherine Penney, investment and tax specialist at Barclays Stockbrokers, acknowledges that an already-established ISA ‘brand’ will encourage investors to plump for a Junior ISA, Barclays hasn’t actually revealed its offering yet. Neither have HSBC or Lloyds – both of which publicly applauded the notion of Junior ISAs when they were announced, which makes it all the more peculiar. At the time of writing, Lloyds Banking Group and Halifax have said they are still working through the details, but they both say there are definite plans to launch a Junior ISA “in due course”.
“IFAs can look to a new pool of investors.”
David White, head of Fidelity Funds Network.
Even F&C, which has been one of the leaders in CTFs, has been slow to show its hand, simply stating that its Junior ISA should be launched “before the end of the year.” The Children’s Mutual, another big name in children’s investment products, also confirmed it intends to launch a Junior ISA, but details had not been released at the time of going to press.
David White, head of FundsNetwork, says that providers who have failed to get their Junior ISA offering to market from the November launch are missing a trick. “We have already seen an overwhelming response from advisers since we announced that we would be offering a Junior ISA,” he said. “As one of only a small number of adviser platforms that will be offering a Junior ISA from 1 November, we are keen to support those advisers who are keen to offer this as an additional service to their clients.”
He says the Junior ISA is a positive step for advisers. “It’s an opportunity to seek out the next generation of investors and help change the way the nation thinks about saving. Advisers can start a conversation with existing clients who may want to invest for their children or grandchildren, and they can look to a new pool of investors which need advice.”
The providers that have so far revealed their offerings are offering a fairly wide choice. Ecclesiastical’s Ethical Junior ISA offers socially responsible investing with a strict remit to not directly invest in the alcohol, tobacco or firearms industries. Its ISA starts at £10 a month and has a 1.5% annual management fee. Shari’ah investors can choose the Junior ISA from the Scottish Widows Investment Partnerhip, which again starts at £10 a month and has a 1.5% annual management fee. Like any other Shari’ah fund, it is steered by a Shari’ah advisory board.
There are quite a few fund managers and investment groups with offerings in the pipeline that had not been finalised at the time of going to press. Among them was Fundsmith, the fund launched by City veteran Terry Smith, which says it plans to launch a Junior ISA “later this year”. Ten there’s Witan Investment Trust, whose Junior Jump Isa will form part of its children’s savings plan Jump Savings, investing in the group’s multi-manager investment trust.
Legal & General Investments is planning to launch a Junior ISA, while Sipp provider AJ Bell is set to offer one on its Sippdeal platform. It will have the same pricing structure as its investment ISAs, with no initial fee and no annual administration fee.
It should be clear that not all Junior ISAs will be marketed through the IFA channel, of course: for instance, Family Investment, which runs most of the Post Office’s ISAs, will be making its junior stocks and shares ISA available through the direct channel.
Shepherds Friendly is launching its own ethical Junior ISA, as is Foresters Friendly Society (part of the Treasury’s Junior ISA provider focus group). But neither could give any further details at the time of going to press. Wesleyan could only confirm that it is planning to launch a Junior cash ISA this year.
“The successful IFAs will be those who offer a broader advisory service that takes in their clients’ entire financial planning situation. It won’t be about commission, it’ll be about being trusted.”
What’s In It For An IFA?
As we’ve seen, not all of the Junior ISA offerings are likely to generate income for IFAs – or at least, not directly – and some parents may still prefer the supermarket approach. Fidelity International’s Junior ISA allows investors to choose from around 1,200 funds from more than 70 providers. While Hargreaves Lansdown’s HL Vantage Junior Isa offers even more choice, with around 2,400 funds to choose from through its fund supermarket. But if all this sounds worrying for an adviser right now, perhaps we should go back to one of the key truths that RDR is about to bring to the fore. Namely, that as the transition to fee-based starts to bite into the middle and lower-income clientele, the successful IFAs will be those who offer a broader advisory service that takes in their clients’ entire financial planning situation. It won’t be about commission, it’ll be about being trusted.
Michael Wilson says: Do Bare Trusts Still Have a Use?
It’s worth mentioning a little about bare trusts here, because many investors query whether these traditional types of child investment wouldn’t do exactly the same job as a Junior ISA (or a CTF of old), but with more flexibility?
The probable truth is that a bare trust will continue to have advantages for someone who wants to invest substantially more than the £3,600 a year maximum that’s currently allowed in a Junior ISA. The beauty of a Junior ISA is that it provides a simple way for parents and grandparents to put a relatively modest sum away for a child’s future – unlike the complex process of setting up a bare trust. And anyway, as Justin Modray from Candid Money explains, as long as the money each parent gifts a child does not result in income of more than £100 in any tax year, then the rigmarole of a bare trust has no tangible tax benefit over a Junior ISA anyway.
Then again, investors can steer clear of the Junior ISA altogether and opt for Scottish Friendly’s My Kid’s Flexible Plan. Its four tax-exempt savings plans do pretty much the same thing as a Junior ISA anyway, because as long as the money is invested for at least 10 years, under current tax law the profits are free from income and capital gains tax. The holders are free to access the money at any time, although in practice there might be tax payable on early redemption. And importantly, the Plan can be held alongside a CTF or Junior ISA. Investments are between £15 and £25 a month tax free and annual charges are capped at 1.5%.
