Glasgow, UK -- (SBWire) -- 08/20/2012 --In an uncertain financial climate, putting money aside for a child’s future is more important than ever. Up until the start of 2011, the Child Trust Fund provided a tax-efficient way to invest money for a child. Money invested would grow free from income and capital gains tax (other than tax on dividends from UK shares) and eligible children – those born before after 2nd September 2022, up until 2nd January 2011 – also received a voucher from the government. This grew with contributions and provided a lump sum when the child turned 18.

Then, in 2011, the Child Trust Fund was discontinued and the Junior ISA was launched. Just like the adult ISA, these tax-free savings accounts allow people to save or invest up to £3,600 per tax year for any child aged 16 years or under. The account remains tax-free until the child’s 18th birthday, helping them build up a nest egg for adult life.

So who is eligible for a Junior ISA?

The Junior ISA (JISA) is a way of making tax-exempt savings and investments for babies born on 3rd January 2011 or later. Children born before 1st September 2002, when the Child Trust Fund was introduced, are also eligible.

Just like the adult ISA, there are two different types of Junior ISA: a Junior Cash ISA and a Junior Stocks and Shares ISA. The Cash ISA is basically a tax-free savings account where the interest is not taxed. Any money put in is protected and a child will get out exactly what is put in plus any interest due.

The Stocks and Shares Junior ISA (sometimes called an Investment Junior ISA) invests participants money in the stockmarket. Here, it’s the returns that are mostly tax-free. As with all stockmarket investments though, it’s important to bear in mind that investments can go down as well as up. That means an investment is not guaranteed and a child could get back less than what was paid in over the years.

To help decide which type of JISA is best, it’s a good idea to think about why one is putting money aside for their children. What are the goals for them? Carefully consider the details of the savings or investment plan and it's easy to see how that measures up to financial targets.

Whichever Junior ISA type is choosen, all the money held is exempt from income and capital gains tax (tax is paid on dividends from UK shares). As with any tax break, tax treatment depends on individual circumstances and tax law may change in future.

Making the most of the Junior ISA

A Junior ISA is a straightforward way of building up a fund for a child to use at a time when they need it most. At 18, when they’re able to access the money, a child may be thinking about going to college or university, putting money towards a flat deposit, or heading off on a gap year with friends. The money saved or invested on their behalf could give them a great start, whichever direction they choose.

Once set up (more on that later), anyone can contribute towards these tax free savings accounts – so grandparents, relatives or family friends can all be part of building a child’s financial future. And when the child is old enough, they can encourage them to follow their example and save or invest in their ISA too.

Another big benefit of the Junior ISA is its flexibility. Participants can start, stop, raise or lower payments whenever they'd like. Savers can move money between a Junior Cash ISA and a Junior Stocks and Shares ISA freely too, as many times as they like. As long as the overall yearly deposits don’t exceed £3,600, there’s nothing stopping someone from switching types to suit their financial goals. In this respect, the JISA offers more flexibility than adult ISAs allow, where they can only move from cash to investment, and not vice versa.

Saving for the long term – options

Whether a participant likes the sound of the cash or investment type, it’s important to remember that a Junior ISA is a long-term plan. Once the money is saved away, that’s it. Neither a participant nor the child can access it until the child turns 18. For many parents, this is a good thing. It means the child will receive a lump sum when they’re at an age when they can really benefit from it. And because the money’s locked away, there’s no temptation to dip into the pot over the years. Bear in mind though that with this type of saving, participants can’t take the money if they're short of cash and need it. If they want this option, a product like Scottish Friendly’s Parent’s Flexible Investment Plan may be more suitable.

Another thing to consider is who the money belongs to. From the day money goes into a Junior ISA, it belongs to a child, not to the participant. As soon as a child reaches their 18th birthday and the money becomes accessible, it can only be withdrawn by them. This is an important point and before taking out an ISA, they should consider whether they want their 18 year-old to have complete autonomy over all of the cash they have put in. If the answer is ‘no’, saving for a child’s future with a product like Scottish Friendly’s Parent’s Flexible Plan could be a better option.

Of course it’s never too early to get a child thinking about financial responsibility, so talk to them about their goals and plans, sharing thoughts on how their money could help them get off to the best start in their adult life. By setting a good savings example, participants are more likely to encourage their children to have a healthy and responsible attitude to money.

Invest for children, tax-free with the Scottish Friendly Junior ISA.

Scottish Friendly’s Junior ISA is a stocks and shares investment. It allows participants to invest up to £3,600 in the current tax year, paying in monthly amounts or lump sums. How much depends on each individual- One can start from as little as £10 a month, or pay in lump sums from just £50.

With the Scottish Friendly Junior ISA, participants are in control of how their money is invested. They can decide whether their money is in the Managed Growth Fund or the UK Growth Fund, or even split it between the two. Either way, they’ll be using the strengths of expert fund managers who aim to profit from the long-term potential of the stock market on a child’s behalf. Of course, the value of these funds can go down as well as up and the original investment is not guaranteed.

Opening a Scottish Friendly Junior ISA for a child is really simple – simply apply online or download an application form and pop it in the post. And once it’s set up, putting money aside for a child’s future could quickly become a habit.

About Scottish Friendly
Scottish Friendly is a progressive and modern financial services group. The group provides investors and their families with a wide range of investment products.