To encourage parents, the UK government launched Child Trust Funds (CTFs) in 2002, paying up to £250 into the accounts of those born between 1 September 2002 and 2 January 2011. Perhaps unknown to parents, accounts were even opened on behalf of each child even if parents hadn’t done so themselves. Indeed, the tax authority said in 2015 that more than 700,000 CTFs remain dormant.
Children born since 3 January 2011 do not qualify for CTFs, which were replaced that year by Junior ISAs. These boast the same tax advantages – namely that any income or capital gains earned within the wrapper will be enjoyed tax-free – but there is no government contribution. Neither can be accessed until the child reaches 18, when they inherit control over the assets.
When you’re thinking about investing through a Junior ISA, it’s important to remember that Junior ISA tax rules may change in the future. The tax advantages of investing through a Junior ISA will also depend on your personal circumstances.
Since April 2015, parents have been able to transfer money saved in CTFs to Junior ISAs, but would this be the right choice for your child’s financial future? Here are three reasons why making the switch could be worth it over the long term.
1. Greater choice
Three out of four accounts are default ‘stakeholder’ CTFs, where money is automatically invested into funds – typically index-trackers that follow the performance of an overall market – chosen by the provider.
Stakeholder CTFs also have a mandatory ‘lifestyling’ feature, whereby investments are automatically moved towards lower risk assets from a child’s 15th birthday, to reduce their exposure to more volatile assets in the run-up to maturity, at age 18.
Importantly, the oldest children born under the CTF regime are turning 15 and their savings are now being reallocated in this way. For those with a longer-term investment horizon, looking beyond their first car to, say, their first home, assets with higher growth prospects may be more suitable than those chosen for having lower price volatility.
Within a Junior ISA wrapper, you can choose from a wider range of funds to match your chosen investment strategy for your child. You can only save the same amount – currently up to £4,368 this tax year – into a Junior ISA as a CTF, but this can be split flexibly between a stocks and shares ISA and a cash ISA if you so wish.
The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.
2. Lower costs
One of the most common criticisms of CTFs relates to their charges.
Annual charges on default stakeholder CTFs might be capped at 1.5% of the account’s value, but several of the largest CTF providers levy the maximum 1.5% or only just under.
Given that stakeholder CTFs are stockmarket-based, for investments that typically track UK market indices, an annual charge of 1.5% is relatively high. It is twice the 0.75% charge cap placed on similar default workplace pension funds, for instance.
These so-called ‘passive’ funds – the opposite of ‘active’ funds – are generally much cheaper to own elsewhere, including in Junior ISAs.
Active funds often charge higher fees because they are professionally managed with the aim of achieving better performance for investors than a broad market index.
It is worth remembering that higher charges might be worth paying if you receive better investment performance, but you should know what you are getting in return. Paying higher charges for the same product could reduce the value of your child’s savings by the time they come to need them.
By comparing the value proposition offered by your CTF provider, you may find that switching the funds to a Junior ISA could lower the charges paid from your child’s savings.
It couldn’t be much easier to transfer your existing CTF account to a Junior ISA.
After choosing the Junior ISA into which you wish to switch your child’s savings, you should contact that provider to check they accept inward transfers. They will typically ask you for details including your current CTF account and manager, and your child’s unique CTF reference number – this nine-character code will be on your annual CTF statement.
If you have lost track of a CTF, there is a free government tool to help you trace it – click here.
From application, the transfer process should take around a month to complete. Whilst your investment is being transferred, there’s a short period of time when it will be out of the market. During this time, it won’t gain or lose value.
Please remember that it’s only possible to transfer the full balance of a CTF to a Junior ISA. Part transfers cannot be made under government rules, nor is the process reversible – it is not permitted to convert a Junior ISA back to a CTF.
While many Junior ISA providers, including M&G, do not charge a fee to transfer the investment, bear in mind that your current CTF provider might impose exit charges if you transfer funds out. So it is always best to check with them in advance.
After transferring a CTF into a Junior ISA, you can choose from our full range of expertly managed funds as part of your plan for your child's future.
Find out more about transferring your CTF to M&G
When you're deciding how to invest, it's important to remember the value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.