The countdown is on: move your child’s savings into an Isa | Melanie Wright
Millions of parents with savings in child trust funds (CTFs) will finally be able to move their money to more competitive Junior Isas in a few weeks’ time. But will they do it?
Research from Scottish Friendly reveals that almost 60% of parents with children aged from four to 11 (the age range in which children were eligible for a CTF) are unaware of the changing legislation that will allow them to move their money into a Junior Isa from 6 April.
Tax-free CTFs were launched 10 years ago as a way of encouraging parents to save for their children. They were replaced by Junior Isas in 2011, but only children born on or after 3 January 2011, or before 1 September 2002, are eligible for those. More than 6 million children born outside these dates have been stuck with CTFs – until now.
Why should I switch my child’s savings into a Junior Isa?
Since CTF accounts stopped being sold, providers have focused on attracting investors into Junior Isas, leaving those with CTFs with less investment choice and much steeper charges.
Justin Modray of independent financial adviser Candid Financial Advice says: “If your child has a CTF invested in shares or funds, you are very likely to be better off transferring into a Junior Isa, primarily because you should be able to save money.
“The vast majority of shares CTFs – for example, those offered by Family Investments and the Children’s Mutual – charge 1.5% a year. If you were to transfer to the Fidelity platform via discount broker Cavendish Online, for example, this would reduce your charges to 0.25% plus underlying fund costs. Opt for a UK tracker fund at 0.07% and your total annual cost will be 0.32% - almost a fifth of a typical CTFs.
“There will also be a much wider investment choice via a Junior Isa held on an investment platform, with usually about 1,000 or more funds to choose from.”
How will the switching work?
Your first port of call should be the provider that you want to switch to. It will give you a transfer form, which asks for your child’s details, your details, the account you are switching from and a direct debit instruction if you want to make regular payments into the new account.
Dean Aitchison of KMD Private Wealth Management says: “Whether it’s switching current accounts or Isas, over the years transfer processes have become simpler, with the new provider doing much of the work for you. Usually, all that is required is to complete a short form.”
The length of time it takes to make a transfer will vary from provider to provider, but F&C Investments, for example, says transfers would be completed within 30 days.
Do I have to pay to transfer?
Stakeholder CTFs (which covers the vast majority of accounts) may charge only an annual fee of no more than 1.5%, and they cannot charge exit fees, so there’ll be no “leaving cost” when you transfer to a Junior Isa. There are also no exit fees for transferring from cash CTFs. Non-stakeholder CTFs however, can charge initial, annual and exit fees as they wish. It’s also worth checking whether there is an exit fee on any Junior Isa you choose in case you want to transfer from that provider later.
Can I put more into a Junior Isa than I can into a CTF?
No, the limits are the same for both Junior Isas and CTFs. You can invest up to £4,000 a year in cash, stocks and shares or a combination of both this tax year. The limit rises to £4,080 for the next tax year, which starts on 6 April 2015. If you want to invest in a mix of both cash and shares, these do not have to be operated by the same provider, but you can’t exceed the £4,000 limit overall.
So which Junior Isashould I choose?
One of the main things that will put some people off transferring from CTFs to Junior Isas is, paradoxically, too much choice. Where do you start?
As you will be investing over a long period, experts usually recommend investing in stocks and shares, as, historically, equities outperform cash. Any money held in cash accounts will gradually be eroded by inflation.
Jason Hollands of Tilney Bestinvest says: “Over time you could build a portfolio of investments that might include funds investing in the US, Europe, Japan, Asia or emerging markets alongside the UK.
“Instead, you could select a fund or an investment trust that provides a one-stop-shop approach to investing across global markets.
“An example of the latter is the Scottish Mortgage Investment Trust, which, confusingly, neither specialises in investing in Scotland nor has anything to do with mortgages.
“This venerable-sounding investment trust is actually a gung-ho investment portfolio of high-growth companies from across the globe, so it takes a riskier approach but one that may make sense for a truly long-term investment on behalf of a young child.”
Over 10 years the trust has returned 350%, and over five years, 171%.
“By way of comparison,” Hollands says, “the UK stock market, as measured by the FTSE All Share Index, notched up 110% over 10 years and 62% over five years.”
If I want to stick with cash, where can I find the best Junior Isa returns?
The best-buy cash Junior Isa available now is from Coventry Building Society and pays a tax-free annual rate of 3.25%. Coventry has confirmed that it will accept transfers from CTFs into this account. The top-paying CTF cash account is from Yorkshire Building Society. It pays 3% tax-free, but this rate includes a 0.7% bonus, which disappears after 12 months.
Aitchison says: “If you are looking for a Junior cash Isa, we particularly like the Coventry deal, as it accepts transfers in and can be opened online, by post, by phone or in a branch, so is more flexible than some other best-buy Junior Isas.”
I didn’t think children paid tax anyway, so is it even worth going for a Junior cash Isa?
Children are, in fact, taxed in the same way as adults, so in the present tax year they can earn up to a personal allowance of £10,000 from either wages or interest, before they have to pay income tax. The vast majority of children don’t use up this allowance, which means their savings interest is tax-free. The main advantage of Junior cash Isas or CTFs over a regular child’s savings account is that parents can pay into these accounts without being affected by tax rules that limit the interest on gifts from parents.
Under these rules, if a parent gives money to a child and it generates more than £100 a year in interest, all the interest is then taxed at the parent’s tax rate. If savings are held in a Junior Isa, the interest remains tax-free.
What are the disadvantages of Junior Isas?
It is always worth remembering with both CTFs and Junior Isas that all funds will be in your child’s name and are locked away until they are 18, at which point you may have little say in what they spend the money on.
“Parents should consider whether or not they are using all of their own Isa allowances,” Aitchison says. “If they are not, they could earmark some of their own allowance for their children, as this strategy offers more flexibility, in that the parent maintains control and access to the savings.”
Change has been poorly publicised
Jacquie Ferrin is the mother of four young children – Joshua, nine, Lily, eight, Rory, three, and Joe, nine months. She has child trust funds for her two eldest, into which she paid the £250 vouchers from the government when the children were born, writes Lisa Bachelor.
“We were so busy with the two eldest being born so close together that, in each case, we paid the money into a stock market CTF account and then forgot about it,” she says. “We glance at the statements each year, and at one point we did notice that Joshua’s account had gone down to £100. It is now £600 but that’s after nine years of investment.”
Jacqui and her husband Noel, who is the commercial director at a publishing company, don’t think they can afford to top up the accounts.
“Any money we save for the children we use to pay for summer holiday activities,” she says. “I think it’s incredibly difficult for a parent to think about anything long-term because of the cost of day-to-day things.”
Jacquie says she was aware that the option to transfer money into Junior Isas was coming up but had to search for information about it.
“Given that long-term saving for your children is so important I am surprised that this has not been publicised more widely,” she says.
The couple now plan to open Junior Isas for all four children in April, and to transfer Joshua and Lily’s child trust funds into those.
“That way, at least all the children will have the same accounts,” she says. “I hope we’ll be in a position to pay into them over time as I do worry about how we will ever pay something like tuition fees for all four.”