23rd October 2014
Junior Individual Savings Accounts (ISAs) are growing-up fast as not only will 1 November mark their third birthday but next year should see their popularity increase markedly.
Like the pensions market, the child saving arena is set to enjoy its own overhaul in 2015.
Junior Isas, which essentially replaced Child Trust Funds (CTFs), are tax-efficient savings vehicles aimed at encouraging families to squirrel away cash for their children’s futures. With a Junior Isa, families can save up to £4,000 every tax year and all gains and interest are free from the clutches of HMRC and from 6 April parents will be able to transfer their CTF into a Junior ISA, a privilege which to date has been denied.
The Child Trust Fund (CTF) scheme was originally launched by Labour in 2005, where those born between 1 September 2002 and 2 January 2011 were given a £250 voucher, where additional contributions could be made. They were however subsequently scrapped by the Coalition government.
Danny Cox, chartered financial planner at Hargreaves Lansdown said: “Unfortunately since the launch of the Junior ISA, Child Trust Fund products have become second tier and many somewhat left behind. In some cases interest rates offered by providers remain lower on CTFs than on their Junior ISA counterparts, disadvantaging many children simply by virtue of their age.”
The latest HMRC stats show 432,000 Junior ISA accounts were subscribed to in 2013/14 of which nearly three quarters were in cash. The average subscription is £1,391 for cash and £1,208 for stocks and shares Junior ISA which is larger than the average value of a CTF at £796 (April 2012 data).
Given that parents will be able to transfer into a Junior Isa next year, Cox recommended that in the meantime investors should review their accounts and start considering their options.
He said: “As with any savings or investment product, check you are getting the best value for money and that your cash is working hard for you. Start thinking about whether a transfer to an alternative CTF, or from April, a transfer to a Junior ISA may improve the prospects for your savings.
“Children with CTFs will now be aged between 3 and 12 with the first maturities at age 18 starting in 2020. Those who are happy to accept the ups and downs of the markets have sufficient time to invest in the stock market rather than be in cash, where returns are unlikely to beat inflation over time. Those who wish to remain in cash should still consider a transfer to a Cash Junior ISA as, in some cases, the interest rates are better than the CTF equivalents.”
Although not yet confirmed in legislation, Cox noted that from 6 April, it also looks like those with CTFs will be able to subscribe £4,000 to these accounts, transfer to a Junior ISA and then subscribe a further £4,000 in the same tax year, a total of £8,000.
But before you switch from a CTF into a Junior ISA check with your provider what the costs might be. Stakeholder and cash CTFs will not have any charges to transfer to Junior ISA; stakeholders are not allowed to by law. However, some cash CTFs may involve a loss of interest if on a fixed rate deal while non-stakeholder CTFs may apply a transfer charge.