As parents, we want what’s best for our kids, especially on the financial side of things. But giving your little one the best possible future is no easy task and can require a lot of planning. So, where do I start, you ask? Well, if you have an open Child Trust Fund, it could be a good idea to transfer it to a Junior ISA (JISA). And here’s why.
What is a Child Trust Fund (CTF)?
CTFs were launched in April 2005 to encourage long-term saving and give children born between 1st September 2002 and 1st January 2011 a financial head-start in their adult life. With these accounts, parents, or other relatives, could put money aside for their little ones, and the taxman would stay away from their pot. Also, the government would make a contribution between £250 and £500, depending on the household income, to boost each fund.
Back then, you could choose between three types of CTF: Cash, Shares, and Stakeholder. With a Cash CTF, you could save money and your child would earn tax-free interest on their money. With the two other types, Shares and Stakeholder, your child could be invested in a number of investments, such as shares and bonds.
CTFs are no longer available today, as they were replaced by Junior ISAs in 2011 and you’re not allowed to hold both at the same time. If you have a Child Trust Fund open, you can still pay into it as long as you don’t go over the yearly limit, and your child will still be able to benefit from tax relief. One thing to keep in mind though is that your child will not receive money from the government anymore.
What is a Junior ISA?
Junior ISAs are quite similar to CTFs – not only do they allow you to save and invest for your child, they’re designed to keep the government away from your child’s potential gains.
In total, there are two types of Junior ISA: Cash and Stocks and Shares. The former works like a Cash CTF – you save money and your child will receive a little interest on it. With the latter, it gives the opportunity to invest in a large range of investments, such as shares, bonds, property, and commodities, and they won’t need to pay UK tax on any returns they make.
Junior ISAs come with a JISA annual limit of £9,000 (subject to change), and every year you have until midnight 5th April to make the most of your child ISA allowance. Plus, everything you put in a Junior ISA belongs to your child. That means nobody can dip into their pot, not even you! The money becomes accessible on their 18th birthday when your child will get full control of their funds. At the same time, their account will turn into an adult ISA and they’ll be able to choose what to do with their money, whether that’s using it to buy a home, or leaving it alone so it can potentially grow a bit more.
So, should you transfer your CTF to a Junior ISA?
Well, the answer will greatly depend on your personal circumstances. For instance, if you’re disappointed with the returns delivered by your child’s account, or think you’re paying too much in fees, transferring your CTF to a Junior ISA could be a wise thing to do. Generally speaking, CTFs have become less attractive – mainly because providers can no longer entice customers to open new accounts. For example, the interest rates offered by Cash CTFs tend to be lower than a Junior Cash ISAs. Also, with Shares or Stakeholder CTFs, the range of investment choices available may be limited, meaning your child could be missing on potential opportunities. With a Junior Stocks and Shares ISA, their money would typically be invested in a wider array of investments1. Again, the choice to transfer or not is up to you, but it could be a good idea to keep an eye on what Junior ISA providers offer, until something catches your attention.
How to transfer a CTF to a Junior ISA?
Transferring a CTF to a Junior ISA is easier than you might think. But before transferring anything, it's important to compare Junior ISA providers. If you’ve located your CTF and want to move the account into a Junior Stocks and Shares ISA, then digital investment platforms, like Wealthify, can help. The process is simple – you’ll just have to tell us how much you need to transfer and choose the risk level that suits you. You’ll also need to complete our official transfer form to keep all your tax benefits. One thing to remember is that you’ll have to transfer the full balance since your child cannot hold both a CTF and a Junior ISA. As soon as the transfer is completed, your CTF will be closed and your child will become the owner of a new Junior ISA.
We’ve created a separate blog to provide information if you’ve lost your Child Trust Fund.
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.