Government confirms higher limit for Junior ISA

Posted on July 28th, 2011 | Categories - Financial News, Savings

Following recent press speculation the government has confirmed that the new Junior ISA, will have an annual contribution limit of £3,600, not £3,000 as was previously announced.

The new Junior ISA is due to be launched later this year.

The government has also confirmed that in line with the ‘adult’ version, both cash and stocks and shares Junior ISAs will be available, both types will be able to be held at the same time.

The new Junior ISA has been introduced following the abolition of the Child Trust Fund (CTF) introduced by the last government. Existing CTFs will be able to continue but children with this type of account will not be able to open a Junior ISA, which will only be available to children born after 3rd January 2011.

In common with CTFs any savings in a Junior ISA will be locked away until a child turns 18. At that date the Junior ISA will convert to the ‘adult’ version, this is not the case with the CTF.

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Figures from Fidelity, who are one of a number of providers committed to offering the Junior ISA, show how valuable a Junior ISA could be in the future.
Fidelity have shown that if the full Junior ISA allowance was invested every year from birth until the age of 18 and assuming a growth rate of 5% per annum with the maximum contribution level adjusted for an inflation rate of 2.5% the Junior ISA would be worth £101,336.

If the money is left invested for a further three years, until the child is 21 it could grow to £163,064, assuming the same 5% growth rate.

Rob Fisher of Fidelity said: “With the increased focus on the individual to provide for themselves, rather than rely on the state or employer, the Junior Isa has the ability to teach an important lesson to young people early in their life. The earlier they start saving, the earlier they can benefit from the compounding of their assets and the long term performance of the stock market.”

Encouraging savings

The government will hope that the new Junior ISA is more popular than the CTF accounts.

Figures from the Tax Incentivised Savings Association (TISA) show that around four million CTFs have had no contributions made to them over and above the government contributions at birth and when a child is aged seven.

Poor performance could be behind the lack of contributions to the CTF. Figures released last week by Which? show that of the 11 banks and building societies offering Cash CTFs seven gave a higher rate of interest on their Cash ISA product which is only available if you are over the age of 16.

Children are also given a raw deal on some savings accounts. The same survey by Which? showed that half of the instant access accounts designed for children pay less than 1% interest per year, the worst offender paid just 0.05% a year.