Sarah Laing looks at the ‘pros’ and ‘cons’ of switching from child trust funds to junior individual savings accounts.
From April 2015, parents and guardians can transfer existing child trust funds (CTFs) to junior individual savings accounts (ISAs), potentially giving better rates and choice for millions of investors.
There are a number of ways to save or invest for children depending on whether you want something tax-efficient but rigid, or flexible but liable to tax. Interest earned from CTFs and Junior ISAs is paid tax-free, but the money is effectively locked in until the child is 18, at which time it belongs to the child.
Standard savings accounts usually offer lower interest rates and the interest is likely to be taxable, but there will be flexibility on withdrawals and transfers, enabling the parent to keep a tight rein on the money. Remember that if a child earns interest over £100 a year from money given to him by parents, the interest will be taxed on the parents at their income tax rate, unless it is in a tax-free Junior ISA or CTF.
Child trust funds
Children born between September 2002 and 2 January 2011 received between £50 and £500 free from the government to save in a CTF. Up to £4,080 (2015/16) may still be added tax-free to this type of account. However, for older or younger children, CTFs have now been replaced by junior ISAs – it is no longer possible to open a new CTF account.
Junior ISAs
Junior ISAs operate in much the same way as ordinary ‘adult’ ISAs. The maximum investment limit for 2015/16 has been set at £4,080, so there is a real opportunity for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren. Until April 2015, it has only been possible for children who do not hold CTFs to invest in Junior ISAs, which has meant that many young savers have been trapped in accounts yielding poor interest rates.
From April 2015, all children (under-18s) who are UK resident should be able to hold a Junior ISA, and transfers from CTF accounts to Junior ISAs will be allowed. This change 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.
Should we transfer a CTF to a Junior ISA?
Whether you should transfer your child’s CTF to a Junior ISA greatly depends on whether your children pay tax now, and whether they will save enough to pay tax on their savings when they're 18. If you think the child will save more than £15,240 (the annual ISA limit from 6 April 2015) in their first 18 years, then it is probably worth considering a Junior ISA, as these convert to full cash ISAs when the child turns 18.
Some financial advisers suggest that if you are not using all of your own annual ISA allowance, then you could set aside some of this to invest for your children. This means that you will still benefit from tax-free savings, but the money will still be under your control. For many there will be plenty of capacity for this, but for those who use all their ISA allowance, or plan on investing a sizeable sum for their children, or have a number of children, this may be restrictive.
Practical Tip:
Just like adults, children are also entitled to an annual personal allowance (£10,600 for 2015/16). Although Junior ISAs (and CTFs) are tax-free, unless the child stands to earn interest of more than £10,600 from other types of investment accounts, he or she should not pay tax on the interest earned in any case. Therefore, for those with modest savings, one of the most important considerations when choosing a savings plan should be the interest rate on offer and potential return on the investment.
