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 2nd 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, and the government would also 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 Child Trust Fund: 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's money could be invested in a number of assets, 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. But if you do have a Child Trust Fund open, you can still pay into it until your child turns 18, as long as you don’t go over the yearly limit (which currently stands at £9,000), and your child will still be able to benefit from tax relief.
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 from the money you put away for them.
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 – and you won't have to pay tax on this. With the latter, it gives the opportunity to invest in a large range of assets, such as shares, bonds, property, and commodities, and your child 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 on 5th April to make the most of your child ISA allowance.
One great thing about a Junior ISA is that everything you put in belongs to your child. That means nobody can dip into their savings 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 could 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.
As an 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, could 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. But do remember that you’ll also need to complete our official transfer form to keep all your tax benefits.
Another thing to keep in mind 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.
Want to transfer but have lost track of your child's CTF? Check out our blog on what to do if you've lost your Child Trust Fund for information that could help.
References:
1. https://www.which.co.uk/money/savings-and-isas/isas/junior-isas/child-trust-funds-a9r761r5czx4
The tax treatment depends on your individual circumstances and may be 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.
Wealthify does not provide financial advice. Seek financial advice if you are unsure about investing.
