Why Child Trust Funds and Junior ISAs matter to you
If you are a young person reading this blog by which I mean someone just turned 18 or who will become 18 by the beginning of 2029 then the information contained in it may well be very valuable to you. This blog is equally of value to parents or grandparents of children of this age.
A Child Trust Fund is a children’s savings account made available to children born between 1 September 2002 and 2 January 2011. They have since been replaced by Junior ISAs but those with existing Child Trust Fund accounts or vouchers can still keep their accounts and pay in.
Child Trust Funds were set up by the Labour government to encourage parents to save for their children. The idea was for children to have some savings at the age of 18, to assist with costs such as further education funding or living alone for the first time.
The government initially put £250 into the tax-free account during a child’s first year, then added another £250 when he or she reached the age of seven. For lower-income families, the payment was £500.
Parents, family and friends could also contribute to the account, up to set limits. The scheme was watered down, then scrapped entirely by the coalition government in January 2011.
The first recipients of Child Trust Fund vouchers will now be turning 18 and can access the money for the first time.
Each month about 55,000 people turn 18, and eventually, a total of about 6.3 million people will be able to redeem the money, or continue to save, according to HM Revenue and Customs (HMRC).
Teenagers can actually take control of their account from the age of 16, but can only withdraw money from it from 18. For those who do nothing, the Child Trust Fund provider will move it into an Individual Savings Account (ISA), which is also tax-free or roll it into another account with similar benefits.
This money has often been in accounts where it is invested in shares. The success of those shares over time will determine their value, as will the original value of the government voucher and any further subscriptions that have been added.
Accountants estimate that with the maximum parental contribution over the years, and investment growth, the fund could be worth as much as £70,000. A more realistic scenario for many people is that the money has sat untouched in accounts over the years. Even then, those born into low-income families are likely to receive a windfall of around £1,500.
Parents were invited to open a Child Trust Fund with one of a number of providers within a year of their child being born. About 4.5 million were set up by parents or guardians. Children in care had accounts set up by local authorities and these are now managed by The Share Foundation – a charity which is also helping people to track down their funds.
In 1.8 million cases when parents did nothing, the accounts were set up automatically by the UK’s tax authority. HMRC admits that in potentially many thousands of cases, youngsters have no idea that they have such savings.
Child Trust Funds can be found using the Government Gateway service, which requires a login or registration. The Child Trust Fund unique reference number or national insurance number is also needed.
The Share Foundation charity runs a free finding service.
More information on Child Trust Funds is available through the government-backed Money and Pensions Service.
Junior ISAs (JISAs) replaced Child Trust Funds (CTFs) when they were scrapped for new savers on 3 January 2011. This means JISAs were originally only available to children born on or after that date, or children aged under 18 but born before 1 September 2002, when the CTF was introduced, and so never had the chance to contribute to a CTF. Since then the rules have been amended so that a child with a CTF can transfer those funds to a Junior ISA, close the CTF and then make future subscriptions to the Junior ISA instead. However anyone with an open CTF cannot apply for a Junior ISA.
Who can have a Junior ISA?
You can open a Junior ISA for your child if they:
- are under 18
- live in the UK.
From April 2015 anyone with money in a Child Trust Fund can transfer it to a Junior ISA.
If a child was born between 2002 and 2011, they might have a Child Trust Fund (CTF). These can be transferred into a Junior ISA.
If the CTF is not transferred, when a child reaches 18 they’ll still be able to access the money.
Junior ISAs are the natural successors to Child Trust Funds.
How does a Junior ISA work?
- A child’s parent or legal guardian must open the Junior ISA account on their behalf.
- Money in the account belongs to the child, but they can’t withdraw it until they turn 18, apart from in exceptional circumstances. They can, however, start managing their account on their own from age 16.
- The Junior ISA limit is £9,000 for the tax year 2020-21. If more than this is put into a Junior ISA, the excess is held in a savings account in trust for the child – it cannot be returned to the donor. Parents, friends and family can all save on behalf of the child as long as the total stays under the annual limit.
- No tax is payable on interest or investment gains.
- When your child turns 18, their account is automatically rolled over into an adult ISA. They can also choose to take the money out and spend it how they like – for example, on driving lessons, further education or job training.
Interestingly now that the Junior ISA limit has more than doubled this tax year to £9,000 a year, significant amounts of money can be saved for young people aged under 18.
Interesting fact: If your child is 16 or 17, they get two ISA allowances – the JISA (or CTF) allowance PLUS the adult cash ISA allowance of £20,000 each year. This is a weird anomaly in the rules that must have been inadvertently drafted by the government.
So what conclusions can we draw from all of this information regarding Child Trust Funds and Junior ISAs?
- A young person turning 18 may have between £1,000-£70,000 in a tax-free Child Trust Fund if invested in stocks and shares. The larger sum only if parents and/or others have contributed the maximum each year into the children’s accounts.
- There may be an account that has been forgotten about so do check.
- A Junior ISA funded to the maximum since January 2011 could easily be worth £100,000 if invested in stocks and shares.
- If aged 16-17 children may contribute to both a JISA (£9K) and an ISA (£20K). This is a significant tax break for those two years.
The upshot of all of this is that you or your children/grandchildren may have large amounts of money invested in tax-free Child Trust Funds and/or JISAs. These savings could be very useful in helping younger people pay off student debt and/or use as a deposit on their first house purchase.
So do check your records just in case you have forgotten about Child Trust Funds or you didn’t know you were entitled to one and, if you do have a significant pot of tax-free money in a CTF or JISA, make sure you manage it wisely. You know it makes sense*.
*The value of investments and the income derived from them may fall as well as rise. You
may not get back what you invest. This communication is for general information only and is
not intended to be individual advice. You are recommended to seek competent professional
advice before taking any action. All statements concerning the tax treatment of products
and their benefits are based on our understanding of current tax law and HM Revenue and
Customs’ practice. Levels and bases of tax relief are subject to change.