Tax-free saving is child's play with JISAs

With the launch, in November last year, of the Junior ISA (JISA), children can now benefit from tax-free saving.

JISAs are as tax-efficient as child trust funds, but do not benefit from a government contribution. JISAs come in two forms: cash, and stocks and shares. The annual investment limit is £3,600.

Like adult ISAs, there is no income or capital gains tax to pay with a JISA. However, a 10% dividend tax is payable on shares held in a stocks and shares account.

A number of good cash JISA deals are available, with the best coming from National Counties Building Society, which pays 3.01% on deposits of £3,000 or more. However, this rate is variable and could fall without notice. Nationwide pays 3% on its JISA on deposits of as little as £1 - the rate includes a 0.9% fixed bonus until the end of October next year. Beverley Building Society also pays 3% on balances over £10, but this rate is variable and could drop.

It's worth remembering that children don't pay tax on their savings unless they earn more than the tax-free allowance of £7,475 (£8,105 for 2012/13). However, JISAs retain their tax-efficient status when the child reaches 18 and will be automatically rolled into an adult ISA, unless the child specifies otherwise, so the investment remains in the tax-efficient wrapper.

Cash JISAs aren't currently keeping pace with inflation, which is now running at 4.2%. Stocks and shares JISAs could beat the rate of inflation, as equities typically perform better over time. Fidelity estimates that savings of £3,600 (the annual allowance) a year from birth could build into £108,000 of savings by the time a child reaches 18, assuming 6% annual growth.

A number of investment managers have launched stocks and shares JISAs that invest in their own funds or offer access to a range of funds.

Low-cost provider Fundsmith's stocks and shares JISA invests in the group's Fundsmith Equity Fund - its total expense ratio is 1.17%. Investment manager Witan offers its Jump JISA, which invests in the Witan Investment Trust (WTAN). It charges a £30 flat fee plus VAT for a minimum lump sum of £250 or a £50 monthly savings plan.

A number of providers and platforms offer JISAs with access to a wide range of funds. Fidelity's JISA offering provides access to more than 2,000 funds through its FundsNetwork platform, while Alliance Trust Savings offers more than 1,400 funds and 21,000 international equities with its JISA. Bestinvest also offers a wide range of funds and shares. Most of the funds have no initial charge.

Looking for more about tax-efficient investments? Take a look at more ISA features.