Investing for a child’s future has never been easier, or as crucial in an era of high inflation. Child Trust Funds initially offered a great tax-free way to put some money away for a child before they were replaced by Junior ISAs. Both are efficient, but a lucky quirk also lets you contribute even more to their savings if you are moving from one to the other.
Building a tax-free pot for a child’s future
Child Trust Funds (CTFs) and Junior ISAs (JISAs) are tax-efficient savings and investment accounts designed for children in the UK. They allow parents, grandparents and other adults to save money for a child's future, such as for education or a first home.
Parents (or grandparents) historically tended to buy NS&I Premium Bonds as a gift on the birth of a child. However, JISAs are likely to prove a better investment option, as their investment time horizon is more suited to the potential of long-term growth. Cash-based products such as premium bonds are also likely to have their real value eroded by inflation over time.
Every child born in the UK between 1 September 2002 and 2 January 2011 would have had a CTF established for them (if not by a parent or legal guardian, then by the Government). For a period between these dates, the Government also paid a bonus into CTFs.
From 2 January 2011 onwards, CTFs were replaced by JISAs. CTFs and JISAs offer the same tax benefits (tax-free income and capital gains) and have the same annual contribution allowance (£9,000 for the 2022/23 tax year). Normally, neither can be accessed until the child turns 18, at which point they both automatically convert to a full adult ISA and the “child” becomes the legal owner.
JISAs can be opened for anyone under the age of 18 who is a UK resident and who does not hold a CTF, or anyone under the age of 18 who transfers their CTF to a JISA and closes the CTF as part of this transfer process.
When compared with JISAs, many CTF accounts have become "languishing" – meaning they could be held in poor-performing, outdated investment plans with high charges, restrictive investment options and could therefore be invested in a more effective manner.
Furthermore, many CTF accounts are often held in cash (because the provider only allows for this, such as those held with banks) and therefore the real value of the savings is being eroded by inflation – like it is for many children who hold NS&I Premium Bonds.
According to HMRC in 2022, about £9bn languished in CTFs, with over 80% of CTFs worth less than £2,500, so it might be worth checking if you can improve the situation of a child whose money may not be working hard enough.
How can Netwealth help?
The good news is that we provide a simple and cost-effective solution for clients to consolidate these CTFs accounts into a JISA. We offer a wide range of risk level portfolios in which the JISA can be invested. Each portfolio is designed to meet the specific objective for the funds, is globally diversified and managed in the same proactive and cost-effective manner as the primary Netwealth client’s portfolio.
The minimum investment into a JISA is only £1,000 (when held as part of the primary client’s portfolio) and these assets will benefit from the lowest fee rate of the client. These competitive fees mean the child has a better chance of reaching their own financial goals. Once transferred to us, you can then view and monitor the performance of the JISA alongside your own accounts on our client portal dashboard.
If you would like to discuss the benefits of transferring your child’s CTF to us, please get in touch. The account opening process is straightforward and typically takes around 30 mins – you can start here.
A quirk which allows you to maximise contributions
Although the CTF and JISA allowances are the same, there is a quirk in the rules which lets you contribute up to three times the allowance in the tax year in which a CTF to JISA transfer takes place. This is because the subscription year for the CTF runs in line with the child’s birthday, whereas the JISA runs in line with the tax year, and the allowances are completely independent.
How this characteristic could work in practice
For a child born on 1 March, the subscription year for the CTF runs from 1 March to 28 February. So if not already used earlier, before 1 March 2023, a CTF contribution of £9,000 could be made. And from 1 March 2023, another CTF contribution of £9,000 could be made.
The CTF could then be transferred to a JISA, at which point the JISA allowance for the 2022/23 tax year (also £9,000) could be used before the end of the tax year (5 April 2023). This effectively allows for up to three contributions (totalling up to £27,000) to be made in the same tax year.
Get in touch for a no-obligation and free consultation if you would like to gain more clarity about investing for a child or your family, or indeed, any aspect of your finances.
Please note, the value of your investments can go down as well as up.
Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions.