Sarah Laing provides an update on the government’s decision to allow parents to transfer child trust funds to junior ISAs.
The government recently announced that from April 2015 parents will be allowed to transfer child trust funds (CTFs) to junior ISAs, which will potentially give better rates and choice for some six million investors.
Background:
All babies born between September 2002 and 2 January 2011 received between £50 and £500 free from the government to save in a CTF. Up to £3,720 a tax year (2013/14) can still be added tax-free to this type of account and the investment limit is set to rise to £3,840 for 2014/15. However, for older or younger children, CTFs have now been replaced by junior ISAs.
Junior ISAs were introduced from November 2011, and are currently available to UK resident children (under 18s) who do not have a CTF account. Junior ISAs are tax-relieved and will have many features in common with existing ISA products. They are available as a cash or stocks and shares product. Key features of the accounts can be summarised as follows:
- other people (such as parents or grandparents) can make contributions into the child’s cash account or ‘stocks and shares’ account on behalf of the child;
- each child may have one cash and one ‘stocks and shares’ junior ISA at any one time;
- there is a total annual investment limit of £3,720 for 2013/14, set to rise to £3,840 for 2014/15, for all payments into these accounts; and
- junior ISA accounts will become ‘adult’ ISAs when the child is 18.
As with CTFs, the following rules apply to junior ISAs:
- although the account belongs to the child, the child cannot withdraw money from it until they are 18;
- the child can become responsible for the account when they are 16;
- interest earned on the money held in the account is paid tax-free; and
- a range of banks, building societies, credit unions, friendly societies and stock brokers offer junior ISA accounts.
Changes:
For the past two years the government has blocked parents from transferring money from a CTF into a junior ISA, and during this period some six million young savers have been trapped in poor rates.
Whilst banks and building societies compete for junior ISA subscriptions, the fact that CTFs can no longer be opened means interest rates on cash accounts have fallen. In November 2013, the best rate on a CTF was just half the 6% available on a junior ISA.
However, following a period of consultation, the government has recently confirmed that from April 2015 transfers from CTF accounts to Junior ISAs will be allowed. Around £5 billion of cash is currently invested in CTF accounts, of which under a third is in stocks and shares accounts and the rest in savings accounts. The change from April 2015 is important, as it will allow parents to look for a better return on their investment, pay lower charges, and have more choice of products.
Whilst parents should continue contributing to their children’s CTF accounts for now, as soon as they are able, they should consider switching to a junior ISA where it may be possible to secure a better return on their investment.
Practical Tip:
Although CTF accounts cannot be transferred to junior ISAs until April 2015, it is possible to transfer existing CTFs from one provider to another. Whilst we wait for the change to come into force, parents and guardians should check the interest rate they are receiving now and move to another provider if the rate can be improved.
