Up to five million children born between 1 September 2002 and 3 January 2011 could potentially benefit from the new flexibility to transfer Child Trust Funds (CTFs) into Junior ISAs being introduced from 6 April.
Initially launched with great fanfare by Gordon Brown during his tenure as Chancellor and accompanied by the distribution of £250 vouchers from the State to all new-born children, the Coalition put an end to new CTF accounts being opened in 2011, replacing it with an entirely voluntary scheme, the Junior ISA.
CTFs have become a ‘zombie’ product, with a lack of competition and innovation between providers. According to data from HM Revenue & Customs some 4.84 million CTF accounts, representing almost 80% of all CTFs, are invested in Stakeholder Accounts*. 1.75 million of these were opened by HMRC after parents had taken no action within 12 months of receiving this ‘free money’ for their children.
Stakeholder CTF accounts have effectively been the default option and a key feature of these accounts is a requirement that their charges would be capped at 1.5% per annum. The charging cap will undoubtedly have left some parents with the impression that this must represent value for money. Indeed many providers describe the benefits of their Stakeholder CTFs as being ‘low cost’.
Yet most Stakeholder CTFs are invested in UK index-tracker funds and 1.5% is actually a very high level of fee for such investment strategies. To illustrate this, our Online Investment Service provides access to the Fidelity Index UK W fund, which tracks the UK stock market as defined by the FTSE All Share Index, for on-going charges of just 0.09%. When combined with our Junior ISA account fee of 0.4% per annum, that means total costs of 0.49%, over two-thirds lower than most Stakeholder CTF accounts which are invested in similar, index-tracking funds. As these children’s savings schemes are typically very long-term investments, which are only accessible from age 18, that could make a surprisingly big difference in outcomes over time for what are, fundamentally, very similar investments.
However, costs aside, the fundamental weakness of the CTF market is principally the lack of investment choice available compared to the Junior ISA market. Our Junior ISA alone offers access to more than 2,500 funds as well as investment trusts, Exchange Traded Funds and all UK-listed shares.
While the UK is without doubt a significant, international stock market, it is important to recognise that the UK accounts for around 10% of global equity markets by size. By focusing a child’s investments exclusively on UK-listed companies, you could be forgoing a lot of opportunities. Junior ISAs enable parents to access some of these either by selecting combinations of funds that give exposure to other regions of the world or choosing investments that take a global investment-approach such as the Scottish Mortgage Investment Trust, which invests in high-growth companies from China to the USA and has very low costs. Investors should be aware that the trust is ‘geared’ and can be very volatile. Another option is the Artemis Strategic Assets fund which invests across a wide range of markets and asset classes.
Find out more about Junior ISAs and register for details on how to transfer a Child Trust Fund to a Junior ISA.
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Past performance is not a guide to future performance.
Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing.
Investment trusts are similar to funds in that they provide a means of pooling your money but they are publicly listed companies whose shares are traded on the London Stock Exchange. The price of their shares will fluctuate according to investor demand and changes in the value of their underlying assets.