15:13 04 November 2012
It was launched with a fanfare on November 1 last year, but there's no escaping the fact that Junior Individual Savings Accounts (ISAs) have turned out to be something of a damp squib.
Although Junior ISAs give parents the opportunity to save tax-free for their children, either in stocks and shares or in cash accounts, as of this summer, only 71,000 out of a possible six million accounts had been opened.
This is a crying shame for many reasons. Not least because these accounts enable parents to build up a nest-egg for their children that could help them get onto the property ladder, or with the costs of further education.
There are also significant tax benefits, which include no income tax on savings and no capital gains tax or tax on dividend income.
A further tax advantage is that no tax is payable by any contributor to a Junior ISA. Usually, where gifts from a parent produce more than £100 gross income a year, the whole of the income from the gifts is taxed as the parent's income. A child cannot claim back any tax on that income and nor can interest be paid without tax taken off. But these rules do not apply to investments held in Junior ISA.
Pros and cons
Another plus point is that, unlike their Child Trust Fund predecessors, Junior ISAs offer parents a huge choice of investment funds and savings accounts, catering for every attitude to investment risk.
And because you are investing over a long-term period, returns are maximised - and there's no temptation for your children to dip into the accounts because they aren't allowed access to their money until they reach the age of 18.
That is not to say Junior ISAs are without their drawbacks - many parents might argue that giving their children control over the money as a teenager means they could, for example, blow it all on a car or a few expensive holidays.
But the other side to the argument says failing to save for your children because you are worried about what they will spend it on sends out all the wrong messages. Start teaching children about the value of money and the importance of saving from an early age, runs the logic, and the more likely they are to take a responsible approach later on.
If your child is eligible for a Junior ISA - which means any child born on or after January 3, 2011, and children born before 1 September 2002 - you should certainly consider making the most of your annual £3,600 allowance if you have the funds to spare.
As most investments will be for a period of 10 to 18 years, returns from investing in shares should be better than keeping the money in cash. But if you have little or no faith in the performance of the stock market, you might prefer the steadier performance of a tax-free cash deposit.
Cash children's savings accounts
So, if you are risk-averse, or have an older child for whom the account only has a short lifespan, than cash accounts are likely to be a better bet and most can be opened with just £1.
The Halifax Junior Cash ISA, for example, requires a minimum investment of £1, and pays a massive tax-free rate of 6%, but only if the parent also holds a cash ISA with the bank. If they don't, the rate drops to 3%.
The Nationwide Smart Junior ISA pays 3.25%, including a 1.15% bonus until February 2014, when the rate falls to 2.10%. The minimum deposit is £1. Coventry Building Society's Junior Cash ISA can also be opened with £1, and pays a generous 3.25% tax-free.
You can learn more about Junior ISAs here.
If you've already used your Junior ISA allowance, or want to build some savings for your children that can be accessed before they reach the age of 18, then there are several options to choose from.
The Halifax Kid's Regular Saver account pays an annual equivalent rate (AER) of 6% and you must pay in between £10 and £100 a month. The maximum age the account holder can be is 15.
Another option is West Bromwich Building Society's Fixed Rate Regular Saver account, which pays 4.60% again on monthly savings between £10 and £100. This account has a one year term and no withdrawals are permitted during this time.
If you want easy access to your children's savings, then Virgin Money's Little Rock Instant Access account Issue 2 pays 3% AER on a minimum investment of £1. The maximum amount you can invest in this account is £10,000.
Please note: Any rates or deals mentioned in this article were available at the time of writing.
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