Junior ISAs and Child Trust Funds are long-term savings and investment accounts that allow you to boost your child’s financial future. On the surface, Junior ISAs and Child Trust Funds are very similar, however there are a few differences worth knowing…
How similar are Child Trust Funds and Junior ISAs?
Both Child Trust Funds and Junior ISAs let you save or invest for your little one in a tax-efficient way, because they keep the government’s hands off any gains your child makes. Child Trust Funds were introduced back in April 2005 to help parents give their child a financial head-start in life. Six years later, they were replaced by replaced by Junior ISAs in a bid to simplify the system – although you can still transfer a Child Trust Fund between providers, and you can still pay into an existing one, as long as you don’t go over the yearly limit.
The Child Trust Fund and Junior ISA annual allowance is exactly the same, at £4,260. One of the major benefits of both types of account is that every penny you put in belongs to your little angel and can only be accessed by them when they turn 18. Where the accounts differ is what happens when your child turns 18. A Junior ISA will automatically turn into an adult ISA, giving them the opportunity to carry on saving or investing, whereas a Child Trust Fund will simply pay them the balance, leaving them to decide what to do next.
What are the differences between Child Trust Funds and Junior ISAs?
Part of the complexity with Child Trust Funds comes from the fact there are three types – Cash, Shares and Stakeholder – each with various rules and implications for the saver. Junior ISAs were designed to be more straightforward, with just two kinds available – a Junior Cash ISA and a Junior Stocks & Shares ISA. Parents can choose to open just one, or one each of these two types of Junior ISA.
Cash Trust Funds vs Junior Cash ISA
Junior Cash ISAs and Cash Child Trust Funds work in a similar way: they allow you to save money and earn tax-free interest for your child. Typically, interest rates are higher for Junior Cash ISAs since most providers are no longer actively enticing customers to open Trust Funds. A Junior Cash ISA might earn you up to 4% in the first year, whist the best rate for transferring a Trust Fund to a new provider might be around 2.5% annually1. If you’ve owned a Cash Trust Fund for a number of years, it might be worth comparing what rates other providers can offer.
Shares Trust Funds & Stakeholder Trust Fund vs Junior Stocks & Shares ISA
In the past, there were two ways to invest in a Child Trust Fund (CTF): Shares Trust Funds and Stakeholder Trust Funds. A Shares Trust Fund mostly invests in company shares, but also allows the customer to pick investments themselves, which is not for everyone. Stakeholder Trust Funds work similarly to a pension, focussing heavily on higher risk shares until the child’s 13th birthday, before turning to less risky assets (e.g. government bonds with a fixed interest) as they approach 18. A common problem was that both types of Child Trust Fund came with a limited range of investment choices available. In 2011, these were replaced by a simple Junior Stocks & Shares ISA, offering a much wider choice of investments, including shares, bonds, commodities, and property.
Shares and Stakeholder Trust Funds also tend to cost more in fees and charges than Junior Stocks & Shares ISAs. Stakeholder accounts can charge your child up to 1.5% a year for having their investments pre-selected and managed by experts, which is relatively high compared to some Junior ISA providers. You should typically expect to pay a fee when someone is investing and managing your money for you, but since all charges ultimately eat into your child’s returns, it’s best to try and keep costs to a minimum, by doing your research.
Can you have a Child Trust Fund AND a Junior ISA?
If your child has a Child Trust Fund, you can keep it open, or transfer it to a Junior ISA, but you can’t hold both types at the same time. If you’re looking to get better value or you’re not happy with the performance of your Child Trust Fund, you could transfer it to a Junior ISA. Make sure you consider the pros and cons and research applicable costs and the interest rates on offer. Take into account the child’s age, too: investing should be approached over longer periods of at least five years, which is something to bear in mind if your child is over 13.
Transferring your Child’s Trust Fund to a Junior ISA can be really simple, but you must always use the official transfer process. Never just withdraw the money, or you’ll lose the tax benefits. Once the transfer is completed, your Child Trust Fund will be closed, and your child will become the owner of a new Junior ISA. Current ISA rules allow each child to hold one Junior Cash ISA and one Junior Stocks & Shares ISA. Unless you transfer the Junior ISA to another provider, your child keeps the same account throughout their childhood, unlike adults who can open a new ISA each year.
Learn more about transferring your Child Trust Fund to Wealthify here.
The tax treatment depends on your individual circumstances and maybe subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.