How Does the New Junior ISA Work?

The Junior ISA (or JISA) is finally here. After much hype the new savings and investments vehicle for building wealth on behalf of your children was launched on 1st November 2011. If you haven't got to grips with what exactly these new ISAs are and how they work, this article will aim to give you a handy introduction to them; although bear in mind that the finer details of what is offered by each JISA provider will vary.

Who Can Open An ISA?
The Junior ISA has been launched in the wake of, and effectively as a replacement for, the old Child Trust Fund (CTF) that was closed to new subscriptions in January 2011. Their purpose is to provide parents with a tax efficient way to save money on behalf of their children, to be accessed when they reach adulthood.

As a result the new JISAs cannot be opened on behalf of any children who already have an open CTF against their name and can only be opened for UK resident children who are under the age of 18 (anyone over the age of 16 would be eligible to open a standard cash ISA anyway).

The new JISA accounts need to be opened by and registered to an individual parent or guardian although the funds in the account will remain in the ownership of the child. The registered contact for the account can only change in a strict set of circumstances, such as the change of adoptive parents, although it can be switched into the child's name when they reach 16.

How Are They Constructed?
Following the structure of a regular ISA, the Junior ISA will compose of the same two elements, a Cash ISA and a Stocks and Shares ISA. A Junior ISA can involve one or both of these elements and each element can be held with a different provider, however, only one cash element and one stocks and shares element can be held within the JISA at any given time.

When the child turns 16 they can open a concurrent adult ISA and the subscriptions being made to that ISA will not be affected by or affect their Junior ISA.

What Are The Tax Benefits?
Again the tax savings of a Junior ISA mirror those of its adult counterpart, that is any monies held in deposit in the cash element will be exempt from income tax (although income for children, as with adults, up to the level of £7,475 per annum is exempt from income tax anyway), whilst within the Stocks and Shares element, dividends avoid dividend tax and the interest on bonds will avoids income tax. In addition all capital gains will avoid capital gains tax (CGT).

What Are The Withdrawal Rules?
A key distinction between the Junior ISA and the adult version is that any monies put into the account cannot then be withdrawn at any time, as they could be, in theory, with a standard ISA. Monies placed into a JISA are locked away until the child beneficiary turns 18 (although they will also be able to take over the management of the funds when they turn 16).

If they child decides not to withdraw the funds when they turn 18 the Junior ISA will automatically become an adult ISA.

What Are The Subscription & Transfer Rules/Limits?
As with regular ISAs the amount of money you can place in a JISA is limited for each tax year. The overall limit for the current tax year is £3,600, and this will remain in place for the following 2012/13 tax year. However, in contrast to adult ISAs there is no distinction between how much of this sum can be put into each of the two components - in other words the whole £3,600 can be either placed in the Stocks and Shares component, the Cash component or split between the two.

Also, in contrast to their adult counterparts JISAs do allow transfers from the stocks and shares element to the cash element (in addition to transfers in the opposite direction).

Due to the structure of the new Junior ISA it arguably has two principle uses: 1) to provide a nest egg which is ring fenced until the child turns 18 and which benefits from tax free growth along the way, and 2) to provide an additional tax free savings vehicle for parents who are saving for their child’s future and who have already fully subscribed to their personal ISAs. There are many other options available to parents, grandparents and guardians looking to save on behalf of their children but if you are interested in opening a Junior ISA for these potential benefits it really is worth seeking impartial professional advice and shopping around.