Due to financial constraints imposed on the country by the credit crunch and recession, Child Trust Funds (CTFs) are no longer available for children born after 2nd January 2011.

Child Trust Funds, which started in September 2002, were a good way of putting money aside for a child’s future, but to be fair, for the vast majority of families, the government contribution – up to £250 at birth and a similar amount at age seven – was not significant. What it did achieve was to create a baseline savings plan to which families and friends could add up to £1,200 a year per child, with the money becoming available at age 18. CTFs were tax-free for both the child and parents.

Their withdrawal left a gaping hole in the tax-efficient investment options available to children, leaving just selected NS&I products and Children’s bonds with Friendly Societies, both of which are relatively restrictive.

Why not ISAs?

Unfortunately, the rules for Individual Savings Accounts (ISAs) do not allow those under 16 to hold them at all, and 16 to 18-year-olds can only have a cash ISA for up to half the overall annual allowance for an adult (which is currently £10,680 in the 2011/12 tax year). While this is a relatively good amount, compared with CTFs, being invested solely in cash almost guarantees that the real-terms value of the money will reduce over time, since few interest rates can keep pace with inflation.

Junior ISAs to the rescue

In order to make good this shortfall in investment opportunities, the government announced that it will introduce a new plan, Junior ISAs. These became available in the autumn of 2011 and are available to any child that does not have a CTF and the money can be invested in stocks and shares, as well as cash.

How the plan works

Each eligible child will be able to have one Junior ISA at a time and contributions of up to £3,600 a year can be put in. (This is in addition to up to £2,880 that can be put into a personal pension plan for each child, if required, to which the government adds tax relief to make the total maximum value of the pension contribution £3,600 a year). Unlike the pension contribution limit, the maximum per child invested in a Junior ISA is expected to rise with inflation each year.

Only a parent, or someone with parental responsibility, will actually be able to open a Junior ISA for the child. It is expected, however, that contributions can be paid by parents, other family members and friends. The fund will, of course, belong entirely to the child, who can access the money at age 18. Growth within the account will be tax-free (other than the withholding tax on dividends from UK companies).

Giving children a good start in life

Even without taking inflation into account, it will be possible to contribute as much as £64,800 into a Junior ISA over 18 years (quite apart from any pension contributions, although these are not, of course, currently accessible until age 55). In addition, those between 16 and 18 can invest (or have invested on their behalf) up to £5,340 a year (in today’s terms) into a Cash ISA – making a potential overall total of almost £75,500. This means that families and friends can combine to give each child a great start in life, providing funds that can be used for education costs, or to help them become established in the workplace – or whatever they want.

It is important to take professional advice before making any decision relating to your personal finances.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.