Saving for children is now easier as rules allowing the transfer of Child Trust Funds to Junior ISAs come into force.
First proposed back in December 2013, the new tax year finally saw the introduction of new rules offering the chance for parents to switch their children’s savings from obsolete Child Trust Funds (CTFs) to more flexible Junior ISAs.
CTFs never really caught on. Launched in 2005 to encourage parents to save tax-efficiently for their offspring, CTFs were opened for 6.3 million children born between 1 September 2002 and 2 January 2011, boosted by an initial £250 voucher from the government. When no account was opened by the parents, which happened in 30% of cases¹, the government automatically opened a ‘stakeholder’ CTF on the child’s behalf.
But although some £4.8 billion is currently invested in CTFs, only one in five accounts have had additional contributions made by parents, family or friends¹. Complexity and lack of investment choice were cited as the main problems. When the coalition government replaced CTFs with the more flexible Junior ISAs in 2011, providers of CTF accounts had little incentive to make them an attractive investment proposition.
The rule change now means that millions of children aged between 4 and 12 have savings pots which might be more profitably invested in a Junior ISA for the period until they reach 18. The average stakeholder CTF is worth around £900, whilst non-stakeholder accounts average £1,500¹.
And that head start could be an extremely valuable one given the financial world in which our children are growing up. The Institute of Fiscal Studies estimates that those attending university will graduate with debts in excess of £44,000. The average cost of a house deposit for a first-time buyer is now just under £30,000, and the average age of a first-time buyer is now 30², which is surely incentive enough for parents and children to maximise the potential for savings!
Alternatively, those with the discipline to remain invested will have their Junior ISA rolled-over into a standard ISA once they are 18, and can continue to enjoy the benefits of investing tax-efficiently.
The value transferred from a CTF into a Junior ISA does not count towards the allowance of £4,080 that can be invested in this tax year. Future increases to the annual allowance will be inflation-linked.
Even for the oldest child with a CTF, the remaining years until they reach maturity offer a significant opportunity to build tax-efficient capital for their future, and perhaps help grandparents with Inheritance Tax mitigation through the use of gifting exemptions.
As saving for the children in our lives becomes more of a necessity than an aspiration, the introduction of a more simple and flexible solution is a welcome development in an increasingly complex financial world.
¹ HMRC, November 2013
² Halifax Building Society, 2014
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. The favourable tax treatment given to a Junior ISA may not be maintained in the future as it is subject to changes in legislation.