Quantcast
Menu
Save, make, understand money

Blog

Child Trust Funds v. Junior ISAs

Andrew Townsley
Written By:
Andrew Townsley
Posted:
Updated:
10/12/2014

Andrew Townsley, chief executive of Kingston Unity, dissects these two child savings vehicles.

In last month’s Budget George Osborne announced a consultation into the options for transferring funds held in Child Trust Funds into Junior ISAs. This may mean that for the first time parents can transfer equity-based Child Trust Funds into deposit based accounts.

It is easy to dismiss Child Trust Funds when some only contain the minimum Government contribution of £50 but they do still offer benefits if you choose carefully. While Child Trust Funds opened in 2009 may not have seen much growth, those opened at the end of March 2012 would have experienced a growth rate of just under 15% over the last year. The Government’s decision to make stakeholder Child Trust Funds equity based was fuelled by its belief that over the long term this would provide better returns.

Child Trust Funds at a glance:

– Payments of up to £3,600 per birthday year (rising to £3,720 from April 2013) can be made tax-free into existing Child Trust Funds;
– Money can be paid in by family and friends as gifts;
– Child Trust Funds can also be transferred from and to different providers so parents can make sure they are getting the best service and return on their investment;
– Child Trusts Funds are free from income and capital gains tax, although the tax credit on dividend income can no longer be reclaimed;
– The Fund is held in your child’s name and will be paid out only to them when they reach 18 years of age.

Moving on to Junior ISAs again, parents need to thoroughly research any product before making a decision about where to invest. For example, choosing based purely on a great initial rate is fine as long as you understand how long that rate is applicable for. If it’s just for the first 12 months what happens after that?

If you move the Junior ISA each tax year to avoid a significant drop in interest rate you can still only add funds up to the total of that tax year’s allowance.

Junior ISAs at a glance:

– Parents can save tax-free on their child’s behalf until they reach 16 years of age. Children aged 16 – 17 years can open an ISA in their own name;
– Up to £3600 can be saved each tax year;
– As well as parents, friends and family can also make contributions in the form of gifts;
– If the child does not want to close the Junior ISA when they reach 18 it can be rolled over into a standard adult ISA so they can keep saving;
– Savings cannot be cashed in before the child in whose name the account is in has reached 18 years of age.

It should ultimately be the parents’ decision whether they choose to leave their child’s savings in a Child Trust Fund or transfer them to a Junior ISA. They should opt for the plan that makes it as easy as possible for them to save regularly for their child’s future.