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Budget sets new pathway for children's saving scheme

Budget sets new pathway for children's saving scheme

01/04/2011 11:29

When Chancellor George Osborne ended his Budget speech with a ringing affirmation that "Britain is open for business", the spin doctors may have missed a trick by failing to emphasise that toddlers might get more from his package than whizz-kids of commerce.

For financial advisors and planners think the new Junior ISAs, buried in Treasury documents and due to launch in November, offer a good opportunity to create a new generation of financially secure young adults.

"Junior ISA has the potential to be the most successful children's savings scheme of all time," says Danny Cox at financial advisor Hargreaves Lansdown.

Cox estimates six million children will be eligible at outset, then 800,000 newly eligible each year from birth.

The likely take-up is estimated to be around 1.2 million - a

ssuming 20% of eligible children take it up, and based on the numbers who added parental contributions to Gordon Brown's Child Trust Fund.

With the promise of no capital gains tax, no income tax on savings and no further tax on dividend income, Junior ISAs look an obvious vehicle for equity funds (holding shares and managed funds), rather than cash.

"Somebody saving £3,000 a year in a Junior ISA from birth until age 18, could get a coming-of-age present of £95,730 tax-free, assuming a 6% return after tax and charges," says Cox.

But high-performing funds would have delivered more: £3,000 a year into the Aberdeen Emerging Markets fund over the last 18 years would have produced £202,266, and £150,549 in another high-flyer, Invesco Perpetual Income. Few Junior ISA holders, however, will put their entire holding in one fund.

The hope is that fewer and simpler regulations will encourage far more providers to offer Junior ISAs than Child Trust Funds because, potentially, more savings money will be involved over the longer term.

Patrick Connolly at AWD Chase de Vere says: "While Child Trust Fund providers often had a relatively poor choice of funds, Junior ISAs could see more parents and grandparents committing to regular saving, and hopefully a more profitable long-term business for providers.

"If the investment industry does embrace Junior ISAs with a wide range of quality fund options then, with the tax advantages and simplicity as well, Junior ISAs should become the default option for children's savings."

Gavin Oldham, chief executive of The Share Centre, is equally excited.

He says: "The £3,000 annual limit is expected to be index-linked, so families which make full use of it will be able to build up funds of £70,000 to £80,000 by the time the young person reaches adulthood.

"A lock-in until age 18 is important, although in that respect it differs from an adult ISA. It helps to build familiarisation with the benefits of investment and financial good housekeeping.

"Junior ISAs will then roll into an adult ISA and can benefit young people by helping with student fees, a deposit for first-time house buyers, or any other purpose."

The Share Centre will manage equity Junior ISAs for all UK resident children and young people under 18 who do not have a Child Trust Fund and are therefore eligible to open one, but Oldham points out that anyone making the minimum monthly saving contribution limit of £10 per month will build a pot worth around £3,000 over 18 years.

John Reeve, chief executive at Family Investments, which will also offer the scheme, says: "A default savings product for six million people under 18 who do not have a Child Trust Fund is an important step in developing a savings culture.

"Tax efficiency is an important incentive for parents, and anybody opening a savings account for a child in recent months has faced difficult decisions on where to start.

"Although the £3,000 annual limit is an important incentive for parents, our experience indicates that the average family can only make modest contributions of £20 to £30 per month, which is well below the limit,

"But the attraction of Junior ISAs is their universal availability and simplicity. They will not require complex form filling when opening the product,"

However, Stefan Maryniak, savings expert at uSwitch.com, is less impressed.

"This is the rich man's child trust fund," he says, "With the Government no longer making contributions, only the wealthy or well-off will be able to take advantage.

"But if new Junior ISAs live up to expectations, parents will be able to save nearly three times as much each year for a child than they could in a Child Trust Fund.

"Inevitably some parents will see this as a way of boosting their own tax-free savings. For many others it will be a tax-efficient way of saving for future university fees, or to give a child a nest egg for adulthood."

Grandparents, however, may see the Junior ISA as a highly tax-efficient way of passing money down the generations.

Cox points out that the £3,000 annual limit exactly matches the annual inheritance gift exemption. At present, parents who gift money to an investment in the child's name face a tax bill when annual income is £100 (£200 for joint gifts) or greater.

Of course, Junior ISAs won't get the Government gift of £250 at birth and age seven, enjoyed by holders of Child Trust Funds.

But the value of these handouts is relatively small if regular savings are made over 18 years. The surge in student fees means that hundreds of thousands of 18-year-olds will desperately need substantial savings to avoid horrendous debts building up while they study.

:: Information: Hargreaves Lansdown (0117 900 9000 and www.h-l.co.uk); Family Investments (0800 616 695 and www.familyinvestments.co.uk); AWD Chase de Vere (0845 140 4014 and www.awdchasedevere.co.uk); The Share Centre (01296 414 141 and www.share.co.uk).

Budget poundnotes

:: According to Capita Registrars, small investors returned in droves to the London stock market in the past three months by pouring £473 million into shares, taking total holdings to £233 billion, more than 10% of the market.

What should they do now, with planned coalition spending through to 2015 not too below Gordon Brown in his pomp?

Financial advisor Towry Law says no investor should be over-exposed to any single asset class, especially not equities and property, and it remains gloomy about company prospects in the UK.

Chris Cole, senior client partner at Towry Law, says: "We remain rather pessimistic on the UK economy, where expected growth has been downgraded nearer to our own thinking, although expectations for future years remain too optimistic."

However, Cole thinks shares remain "reasonably well supported, possibly indicative of equities remaining the asset class of choice among higher risk investors."

Towry Law focusses on investors with more than £100,000 to invest for growth and income.

Towry Law enquiries: 0845 788 9933 and www.towrylaw.com

:: The cost of life cover has been falling for 20 years, thanks to increased longevity, medical improvements and fierce competition, but premium rises could follow tax changes buried deep in the Budget print which will siphon an extra £120 million in taxes from the life companies.

However, Matt Morris at Lifesearch, the UK's leading independent life insurance and protection specialist, says working mothers and those who run the family home will find life cover remarkably cheap - about £5 a month for a 30-year-old female in good health.

Couples, he says, should have two single life policies rather than a joint policy which only ever pays out once. If a couple split, each one takes a policy with them.

Lifesearch enquiries: 0800 316 4242 and www.lifesearch.co.uk.

:: With middle-earning householders on £40,000 a year bound to be hit hard by tax and national insurance charges this month, taking out an ISA to put money beyond the grasp of the taxman is more important than ever ahead of the April 5 deadline.

The Share Centre suggests that low-risk investors should go for the Henderson Strategic Bond, while medium riskers might opt for the L&G Alpha Fund. High-risk players can hitch a ride on the Aberdeen Emerging Markets bandwagon, if they are ready for a bumpy ride.

Customers of The Share Centre who invest in any of its Platinum 120 funds avoid any purchase commission, and on 90% of funds listed, there is a 0% initial charge too. Investors who go straight to fund managers, by contrast, can be hit by initial commissions of 5%, sometimes more.

:: Although the Budget made a great play about the need to lure big firms back to Britain, fund manager Gervais Williams at MAM Funds says vital economic recovery really comes from encouraging banks to lend to small companies - sums set aside for this purpose by Project Merlin are "too small to create meaningful employment", he thinks - and also by abolishing the stamp duty on small cap share transactions, which can encourage share prices to rise on junior markets.

Investors keen to back small companies will get a chance to do so in the next few weeks: Gervais Williams, who had a great run at the helm of the Gartmore Irish Smaller Companies investment trust, is heading a new fund which will go fishing for stakes in some up-and-coming tiddlers. It will be called The Diverse Income Trust.

:: High five savers

Phone No Rate Account Period Deposit Interest paid

Principality BS 0845 045 0452 5.01% Five Year Bond 197 Five years £500 Yly

AA 0845 603 6302 5.00% (F) Fixed Rate Account Five Year Bond £1 Yly

Santander 0800 234 6065 3.30% Flexible ISA Issue 3 Instant £1 Yly

Close Savings 0207 392 1772 3.15% Premium Gold 180 Day 180 Days £10,000 Qly

Nationwide BS www.nationwide.co.uk 3.05% MySave Online Plus None £1,000 Mly

:: Top five borrowers

Phone No Rate Period Max% Adv Fee Incentive

HSBC 0800 494999 2.29% variable for term 60% £99 Yes

Vernon BS 0161 429 6262 2.49% disc for two years 75% £495 Yes

ING Direct 0845 032 8800 2.50% disc until 31/03/13 70% none Yes

First Direct 0845 610 0100 2.79% variable for term 65% £199 Yes

Furness BS 0800 220568 3.29% (disc) for three years 80% none Yes

Code:

*K- Operated by Internet, Telephone, or Post

*F - Fixed

*P - Operated by Post

*B - Operated by Post/Telephone

*T - Operated by Telephone

*W - Operated by Internet

*H - Operated by Internet/Telephone

*S - Available only to those aged 50 or over

*R - Available to those aged 60 and over.

:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).

Page: 1234

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