What would you have done if you'd been given £100,000 at the age of 18?
We all hope we would have used it sensibly — keeping it in savings to help with a house later on, using it to pay for training or perhaps helping out our family. Children born this year might need all of it just to cover the cost of university. But the reality is that it would have been very hard not to use at least a bit of it to go on holiday, buy some clothes or just throw a party.
It's more than just a theoretical question now. On November 1 the government launches Junior ISAs — these let friends, family or the child themselves put up to £3,600 a year into a tax-free savings account. Money paid in is kept there until the child turns 18, earning interest tax-free.
And it only takes 5% interest (which may sound fantastical now, but was really very common until three years ago) to turn £300 a month into £106,000 over 18 years in one of these new accounts. If the money is invested in the right stocks and shares instead of a traditional savings account (both of which are allowed with a Junior ISA) growth could be far higher and, of course, the contribution limit will rise in the years to come. That means the £106,000 figure could be an underestimate for many people.
On top of this, the new Junior ISA looks set to be rather popular. Designed to provide tax-free savings to everyone under 18 in the UK, official estimates show that 1.2 million parents will open them for their children.
Anyone can put money into these new accounts on behalf of the child, allowing an easy option for Christmas, birthday or christening presents. Particularly clued-up grandparents can even use them as a way of getting round inheritance tax. Some 43% of people said they would contribute to one for the child of a friend or relative, JP Morgan research finds.
Of course, not everyone will be able to contribute the full amount, but JP Morgan's research shows the average amount people are planning to put away is £93 a month, which adds up to £34,000 by the time the child turns 18 (assuming 5% growth).
So, in a few years time, tens of thousands of teens will be waking up on their 18th birthdays not only being allowed to vote and buy alcoholic drinks legally for the first time, but also rather well off.
[Useful: Free guide to investing in Junior ISAs]
Risk or opportunity
Naturally, handing a teen a huge wodge of cash comes with risks — and that's if they even have any left by their 18th. Because not only can they blow their savings after they turn 18, from the age of 16 they can take control of their money.
"Perhaps it is looking at it from the point of view of a parent, but it strikes me as odd or slightly dangerous that a child of 16 could take over the running of a Junior ISA, which at that stage could have a lot of money in it," Tony Gammon, director at Thesis Asset Management, told Yahoo! Finance.
"They could direct the ISA manager to invest it all in a Russian oil share or perhaps more likely a games console maker… without realising the risks they are taking or the losses they could suffer. The regulation states that the child has the right at 16 to take over the role of 'Registered Contact' without the parent being able to do anything about it."
Of course, as well as a risk, the introduction of the Junior ISA is an opportunity.
As the economic fallout continues from a generation seemingly brought up to borrow and spend on anything that took their fancy, having the opportunity to show children the rewards of patiently putting money aside and how this grows over time could have a great impact on the country's attitude to money.
"Junior ISAs provide an easy and tax efficient way for parents and grandparents to save and will help encourage children to learn about saving and investing," Danny Cox, head of advice at Hargreaves Lansdown told Yahoo! Finance.
"Last tax year 15 million people invested more than £15 billion in ISAs, providing they can capitalise on the phenomenal success of the 'adult' ISA, I expect Junior ISA to become the savings scheme of choice for children."
Melanie Robinson, from financial education charity MyBnk, added: "Junior ISAs offer an excellent opportunity for young people to have a tangible first experience with a financial product.
"Anything that encourages youth saving is a good thing - the sooner young people are familiar with banking, the better they can develop sound financial habits and navigate the system."
Junior ISAs: Key facts
- What are Junior ISAs? Junior ISAs are a new tax-efficient saving account designed for adults to help children save and invest for their future.
- When can I open one? The official Junior ISA launch is 1 November 2011, but not all providers will be launching the Junior ISA.
- Who is eligible for a Junior ISA? Any child resident in the UK who was born on or after 3 January 2011, born before September 2002 and is under 18 or born between those dates and does not already have a Child Trust Fund can open a Junior ISA.
- Who's offering them? Building societies Nationwide and Skipton are among those offering cash Junior ISAs (both paying 3% interest) while Fidelity, Hargreaves Lansdown and The Share Centre are among those offering stocks and shares Junior ISAs. More providers are expected to announce they are providing the account soon.
- How much can be put in? Currently £3,600 a year can be saved in a Junior ISA. This amount will rise in line with the CPI measure of inflation from 6 April 2013 onwards.
- Who can pay into a Junior ISA? Once the account has been opened by the child's parents or guardians, anyone can pay in - including parents, family members, friends or the child directly.
- If someone is 16 and already has an 'adult' ISA, can they still apply for a Junior ISA? Yes.
- Can I put money in stocks and shares as well as cash savings with a Junior ISA? You can split the £3,600 allowance any way you like — or have separate stocks and shares and cash accounts (although the total amount you can pay in remains the same).
- Can you open a new Junior ISA with a different provider each year? No. You can transfer to a new provider if you want, but you can only have one per child.
- Can you take any money out of a Junior ISA before you are 18? No. Any money earned (either in interest or income from investments) is automatically reinvested in the Junior ISA and no withdrawals are allowed.
- What happens to the savings when the children turn 18? The Junior ISA turns into a standard adult ISA when the child turns 18 — this means they can keep their money earning interest tax free or make more contributions if they want.
Junior ISAs and Child Trust Funds
- Can you open a Junior ISA if you have a Child Trust Fund? No. But you can save £3,600 a year, tax-free, in a Child Trust Fund.
- Can you transfer money from Child Trust Fund into a Junior ISA? No, but many experts think the two savings vehicles will be merged in the future.
- Are Child Trust Funds affected by the new Junior ISAs? No. But if a child already has a Child Trust Fund, they cannot open a Junior ISA.
- What if I never invested my Child Trust Fund voucher? The government opened Child Trust Funds automatically on the child's behalf if the vouchers were not used for 12 months. Annual statements from the Child Trust Fund provider should have been sent on to you.
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