Junior ISAs and Child Trust Funds (CTFs) are both forms of tax-free children’s savings accounts, which enable parents or legal guardians to build up a nest egg for their child’s future.
Children can use the money saved for them to help with some of the financial challenges they may face, for example a deposit for a property or university costs.
Only children between certain ages have CTFs, as these were scrapped and replaced by Junior ISAs in 2011. Here’s all you need to know about both types of account, and how people with CTFs will soon be able to transfer into Junior ISAs if they want to.
CTFs and Junior ISAs explained
CTFs were introduced back in 2005, to help parents save for their children. As an incentive to get parents started, children born between September 1, 2002, and August 2, 2010 received a £250 Government contribution into their CTFs. This contribution was later reduced, so that those born between August 2, 2010 and January 2, 2011, received a smaller contribution of £50.
CTFs were eventually scrapped in 2011, and replaced by Junior ISAs (JISAs) in November the same year. But only children born before September 1, 2002 or after January 2, 2011 qualify for Junior ISAs.
In the current tax year (2016/2017) the maximum amount you can contribute to both CTFs and Junior ISAs is £4,080.
This £4,080 limit can either be invested in cash or stocks and shares, or a combination of the two. As with adult ISAs, if your child’s Junior ISA or CTF allowance isn’t used in any tax year, it will be lost forever, as these allowances cannot be rolled over from one year to another.
How the accounts work
Junior ISAs and CTFs work in a similar way to ISAs, in that returns are free of both capital gains tax (CGT) and income tax. Savings in these accounts are held in the child’s name, rather than the parent’s name, and do not have any impact on the parent’s own ISA allowance.
Parents can either make a lump sum payment into the account each year, or they can set up a direct debit or standing order into the account if they want to make monthly payments.
While children can start managing their accounts themselves once they reach the age of 16, they can’t get their hands on savings held in CTFs or Junior ISAs until they reach 18.
At that point they can either cash in these savings or transfer the money into an adult ISA.
Although children don’t normally have to pay tax on their savings, the biggest benefit of Junior ISAs and CTFs is that once the accountholder does become a taxpayer, any savings built up in these accounts over the years will continue to earn interest tax-free.
Children are only permitted one cash Junior ISA and one stocks and shares Junior ISA at any time.
Stocks and shares versus cash
Parents who are prepared to accept an element of risk may want to consider investing in stocks and shares, as, over longer term periods, equities historically perform better than cash savings.
But seek advice from an independent financial advisor if you are unsure which funds to invest in. Remember too that there will be charges involved in investing in a stocks and shares CTF or Junior ISA, so factor those in.
Anyone who doesn’t want to take any risks with their child’s savings, or pay charges, may want to stick with cash accounts instead. But interest rates among providers vary so make sure you compare the accounts.
If you are unhappy with the way your child’s Junior ISA or CTF is performing, you can transfer it to a different provider. It’s possible to transfer a Junior cash ISA to another Junior cash ISA or, or to a stocks and shares Junior ISA. Similarly, if you have a cash CTF, you can transfer to another cash CTF, or to a stocks and shares CTF.
Transfers from CTFs into Junior ISAs
Savers with money held in CTFs have less investment choice and often have to pay steeper charges than those with Junior ISAs. This is because there is less competition among providers as the accounts are no longer sold.
However, the good news is that a rule change in April 2015 has meant it is now possible to move money held in a CTF into a Junior ISA. Be aware though that the accounts won’t be merged automatically, so it is down to you to transfer funds from a CTF into a Junior ISA if you want to.