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Morning Line: Junior Isas will only benefit the wealthy

Anything that encourages people to save is a good thing. But the announcement of the Junior Isa is something of a gimmick which is only likely to benefit the very wealthy.

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by Lorna Bourke on Oct 27, 2010 at 08:47

Morning Line: Junior Isas will only benefit the wealthy

Anything that encourages people to save is a good thing. But the announcement of the introduction of the ‘Junior Isa’ is something of a gimmick which is only likely to benefit the very wealthy. The vast majority of children are non-taxpayers anyway and would not be liable to either income tax or capital gains tax on their savings unless they had investments well in excess of £100,000. Clearly not your average family.

A child is entitled to receive tax free income up to the level of personal allowances, currently £6,475 a year. To generate income at this level, assuming the top available return for cash on deposit of around 5%, a child would have to have investments of more than £129,500 before they would be liable to income tax.

Similarly, a child would need to have enormous amounts of capital before it became liable to Capital Gains Tax. The current annual exemption is £10,100. A child would need to have investments in excess of £200,000 generating 5% capital growth on an annual basis before they would have any CGT liability.

Details of the new Junior Isa scheme have yet to be announced but the only advantage will be if wealthy parents can put money into a Junior Isa without it falling foul of the tax rule that says that any money given to a child by a parent which generates income of £100 a year or more is treated as the parent’s income. If this rule is relaxed to accommodate Junior Isa investment for parents giving money to children there will, no doubt, be many wealthy parents who will take advantage of this concession. But it isn’t going to help the average parent putting money away for their children.

The Junior Isa is intended to replace the now discontinued Child Trust Fund – but without any contribution from government. Like an Isa, money invested in the Junior Isa will be tax free and there will be an annual limit, yet to be announced, on contributions.

Child Trust Funds were abolished back in May and all payments to parents cease from 31st December this year. Children born after 1st September 2002 received vouchers for £250 at birth and on their seventh birthday while children from low-income families, those in receipt of means tested benefits, received vouchers worth £500.

The Junior Isa will be introduced in the autumn of 2011. All funds saved in the account will belong to the child and will be locked away until they reach adulthood at age 18. Money in a Junior Isa can be put on deposit or invested in stocks and shares. The cap has yet to be decided but the limit on adult Isas for the current 2010-11 tax year is £10,200 of which £5,100 can be invested in cash deposits.

It’s difficult to see how the average family will benefit from Junior Isas. Most parents have difficulty saving anything at all if they have young children and a mortgage. Even under the Child Trust Fund, which allowed members of the family to contribute up to £1,200 a year to top up the government contribution, most of the extra saving was done by grandparents. In addition, investment returns are so low that there is little incentive for anyone to save.

Parents saving for their children usually invest in something like a unit trust regular saving scheme to provide capital growth over the long term and therefore do not fall foul of the £100 a year income restriction on parents giving money to children.

Those most likely to benefit from Junior Isas are the children of very wealthy parents where the £100 a year of investment income restricts the amount parents could give without it being taxed as the parent’s income. If, as seem likely, this restriction is lifted for Junior Isas, expect most of the take up to be by wealthy parents.
It looks as though the concession has been introduced following pressure from institutions like the Children’s Mutual and others where the main business was providing Child Trust Fund accounts. Few institutions would have offered Child Trust Funds without the government voucher and IFAs have long pointed out that the £250 or £500 vouchers were the only reason for saving in a CTF.

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17 comments so far. Why not have your say?

This Junior ISA is nothing but a political sop to the masses. It sounds good but not worth the paper its written on. The reson for it is that gradually the populace is becoming acutely aware of the size and Dynamics of the Tax avoidance Industry , largely centred on the City, with Arch practioners Like Barclays Investment Bank for the International Corporates and many Specialist firms setting up Trusts in Tax Havens for Individuals. The fees are enormous but if you escape 40% Inheritance Tax a 15% fee is not out of the way. Corporate structures in Dublin and Luxembourg which nullify UK Tax are rife and are up held by the EU Courts which overides UK tax law. This is the sort of stuff you journalists should be investigating and exposing, because the UK and the USA are being taken to the cleaners on Tax ,leaving the Politicians with only one place to go US the ordinary Tax Payer.

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Giving an 18 year old access to potentially a 6 figure sum is irresponsible: it will not teach them the value of money and there are many examples of it being used for drugs or other dangerous consumption. Parents should retain control until they are say 35. The thing to do is not tell them and keep the passwords secret.

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If they can roll the amount over into an "adult" ISA at the end of it then these could be interesting indeed.

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Lorna (as usual) has missed the point, whilst it's true most children won't benifit from the tax advantages of an ISA but when they are 18 and probably earning this lump sum can remain invested tax free.

Not sure what Grahams point is, sounds more like another "Bank Rant" than the subject of Junior ISAs.

Anon 1......what planet are you on?

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I've said it before and I say it again. Shoot "the wealthy"! The only thing they do for the country is pay tax. Get rid of them so that we are all equal.

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........so we shoot the people who pay the most tax?.....uh! that sounds like a well thought out plan!

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Hi Bob

Read the following. I suppose shooting all the wealthy and bankers is one option, but then who is going to buy YOUR drinks when they all decide to drink overseas?

The Tax System Explained In Beer!

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.

If they paid their bill the way we pay our taxes, it would go something like this?

The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that's what they decided to do..

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes.

So the first four men were unaffected.

They would still drink for free. But what about the other six men? The paying customers?

How could they divide the $20 windfall so that everyone would get his fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so the fifth man, like the first four, now paid nothing (100% savings)

The sixth now paid $2 instead of $3 (33% savings).

The seventh now pay $5 instead of $7 (28% savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 ( 22% savings).

The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20,"declared the sixth man.

He pointed to the tenth man," but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a Dollar, too. It's unfair that he got ten times more than I!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, this is how our tax system works.

The people who pay the highest taxes get the most benefit from a tax reduction.

Tax them too much, attack them for being wealthy, and they just may not show up anymore.

In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.

Professor of Economics

University of Georgia

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible.

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Thats a laugh shoot the wealthy so we will all be equal, within a week you will have rich and poor!

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Wow! I am impressed......a Ph.D and a professor.......no wonder we poor mortals needed such an explanation but if he'd used glasses of wine and not beer then I'd still be confused............thanks.

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Hi David,

My suggestion was only tongue in cheek but, when I think of it, why SHOULD that guy who was wealthy have made such a huge saving? If we can't shoot the wealthy, let's beat them up instead and turn their pockets out at the same time so that we all get a share of any saving. It takes a Professor of Economics to point the way!

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My point was to emphasise that the law of Diminishing Returns applies equally to Taxation. The higher it goes the less you get. Perhaps the Prof could explain that to the idiots in charge.

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By the way the Prof forgot to put QED at the end of his economic Theorem..and then throw the chalk at the boy dozing at the back of the class.

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Well said, Professor. I particularly like your footnotes. :-)

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And the public vote is in - the only sensible one to comment unanimously agreed is Ian Phillips. Yep, again Lorna missed the point completely, she really needs to grow a brain!

The rest of you - you're fired!!

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For the record, a little background research yielded this from David R. Kamerschen's personal webpage on the uga.edu website:

"Contrary to Internet folklore, Dr. Kamerschen is NOT the author of "Tax Cuts: A Simple Lesson in Economics" or “Bar Stool Economics” or anything similar to that. Additionally, he does NOT know who wrote it and he has no opinion on its merits."

http://davidk.myweb.uga.edu/

Also see the reference to this story on snopes:

http://www.snopes.com/business/taxes/howtaxes.asp

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Ian W,

I absolutely refuse to accept that my (two) contributions were not as sensible as that of Ian Phillips. Just because he shares a Christian name with you is not a good enough reason to overlook my contributions.

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Godfrey Billy

Oct 28, 2010 at 16:23

Another gimmick to appease the wealthy after cuts in child benefit and another way of letting the rich avoid paying tax. The rich as we all know avoid paying tax as much as possible. Remember the last government 50% tax levy on salaries over 150000, the media in general concluded not much will be collected because most will find one or the other to avoid paying the tax. The wealthy will always get richer with more help from the government. The tories will not bite the finger that feeds them and so will always give back something to the rich, they never loose. The middle working class and working class are the ones that foot the tax bill and very few of them can afford to put away more money for 'JUNIOR ISA'

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