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Securing Your Child’s Future With Tax Free Savings

by Mike

A combination of the phasing out of the Child Trust Fund and the popularity of the ISA savings product has led to the UK government launching a new ‘Junior ISA’, aimed at savings for the under-18s. But how does it compare to the 529 plan available in the US?

Up until January of this year, parents were able to save for their children’s future by putting money into a Child Trust Fund (CTF). The way these trust funds worked was that the UK government would provide parents with a cash incentive that they could place into a tax-free savings account and then add up to £1,200 per year.

Once the money had been placed in the account it could not be touched until it had been transferred over to the child on their 18th birthday.

Now that these have been phased out the government is looking for other ways to get parents to save for their children’s future and the Junior ISA could be the answer.

But one stipulation of this new Junior ISA is that the money will be ‘locked in’ to the account until the child turns 18 and so it looks set to work more like the old CTF rather than the cash ISA and stocks and shares ISA already available in the UK (click here to learn more about ISA savings accounts).

Unlike the CTF, however, instead of the money going straight to the trustee the account will simply become an ‘adult’ ISA once the child turns 18.

Furthermore, there will be no government contributions into each child’s savings fund.

The ways in which the new accounts will act like an ISA is that it will offer an option to save in cash or stocks and shares and the annual savings limit will be increased to £3,000 per year.

This figure is substantially less than the amount that can be put into a 529 plan, the product used by many adults in the US use as a tax-avantaged way to save for their children’s college fund.

But whilst the 529 plan offers tax breaks and is a savings vehicle for children’s future it varies massively from the UK’s ISA product, mainly because it is designed solely for use as a college fund.

Any savings put into a 529 plan can only be used for college related items, such as tuition fees, books and supplies, whereas the ‘Junior ISA’ does not stipulate how the money saved must be spent. The obvious downside to this is that although it is the parents that have been saving the money, they have no say in how it is eventually used. So whilst they may have been saving for their child’s education there is no guarantee that the child will want to spend this on their education!

The plans also differ in that money can normally be taken from a 529 plan at any time but there is no facility to withdraw money from a Junior ISA.

One way in which the plans are similar is that they both offer multiple ways to save.

Anyone saving money in a 529 plan has the option of a prepaid or a savings plan. The prepaid plan allows parents to purchase tuition credits at their current rate and then use them when their child needs them in the future. The savings plan allows parents a variety of age-based asset allocation options that will be based upon market performance.

The Junior ISA will allow parents to save in cash or through the purchase of stocks and shares.

Although both plans do offer tax incentives to savers and give parents the chance to save for their child’s future they are completely different savings vehicles.

But whichever side of the Atlantic you are on, it’s good to know that there are products available that can benefit your child’s future and not benefit the tax man.

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{ 1 comment… read it below or add one }

Justin @ MoneyIsTheRoot

Pretty cool idea here… though I’d rather see a stipulation of 18 years of age, or college/trade school entrance. There are many kids that have freshman year in college prior to turning 18
Justin @ MoneyIsTheRoot´s last [type] ..My Financial Motivation

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