There's a new way to save money for your child without paying tax on the interest or profits. Here's what you need to know about the government's new Junior ISA scheme.
What is a Junior ISA?
Junior ISAs (Individual Savings Accounts) are a new government backed tax free savings scheme designed to encourage you to save for your child's future. They are designed to replace Child Trust Funds (these are no longer available although you can continue to save in existing Child Trust Fund accounts).
Who can open a Junior ISA?
From the 1st November 2011, any child under the age of 18 and resident in the UK will be eligible to open a Junior ISA - unless the already have a Child Trust Fund.
Essentially this means that children born before September 2002 or after 3rd January 2011 will qualify to open a Junior ISA.
At present children with a Child Trust Fund cannot open or transfer their savings to a Junior ISA, although it is expected that this may be reviewed in the future.
How much can you save in a Junior ISA?
The Junior ISA limit has been set at £3,600 per tax year and will be fixed at this level until April 2013.
After April 2013 the annual Junior ISA limit will be linked to the Consumer Price Index, and from then on the amount you can deposit will track changes to inflation.
The annual deposit limit for Child Trust Funds will also be increased to £3,600 from November 2011 to match Junior ISA limit.
Can a child have more than one Junior ISA?
The maximum number of Junior ISA accounts any child can have open at any point is two - one Cash ISA Junior ISA account and one Investment Junior ISA account.
The £3,600 annual limit can be split across the two types of Junior ISA but the total mustn't exceed this limit at any point.
Although you won't be able to open a new Junior ISA for your child each tax year, you will be able to transfer their savings to a new Junior ISA with a different provider at any point in search for a better deal.
You should also be able to transfer money held in a cash Junior ISA to an investment Junior ISA should you wish, although confirmation of whether you'll be able to transfer in the other direction is still pending.
Can you access Junior ISA savings?
Once you deposit money into a Junior ISA it will be 'locked in' until your child turns 18.
The main reason for this restriction is to encourage parents and children to save for their long term future, so they can contribute towards major purchases such as a deposit on a home or towards university fees.
However, it means that you need to carefully consider whether you'll need access to the money you plan save for your child in the future before you pay it into a Junior ISA in their name.
Can anyone open a Junior ISA?
At present only parents and legally appointed guardians will be able to open a Junior ISA for their child.
They will also be the only people entrusted to manage their child's Junior ISAs until they reach the age of 16 and can manage them themselves.
However, although only parents or legal guardians can open a Junior ISAs, anyone is free to contribute to a child's Junior ISA savings, as long as the amount doesn't exceed the annual limit.
What happens when your child reaches 18?
When your child turns 18 they will be able to take full control of their Junior ISA, and if they so wish withdraw the money and spend it.
At this stage any money in the account will be under their control, and you will have no control over whether your child spends or saves the cash.
Subsequently you need to consider if you are happy for your child to take control of their savings on their 18th birthday when looking for the best way to save for your child's future.
If your child doesn't withdraw their savings immediately, the Junior ISA will automatically become a cash ISA or an investment ISA on their 18th birthday and be subject to existing adult ISA rules.
Where can you get a Junior ISA from?
Junior ISAs are set to be available from all the major bank, building societies and savings account providers from the 1st November.
Competition for your child's savings is likely to be fierce and details of the accounts on offer are expected weeks before the launch date.
You can check a full list of accounts and compare your Junior ISAs side by side in the Junior ISA comparison money.co.uk
Will the government contribute to Junior ISAs?
The short answer is no. Unlike Child Trust Funds, the government has announced that it won't be donating any cash to start off Junior ISAs, although any savings will remain tax free.