Having a child is a special life event that many of us will experience. However, we are increasingly hearing that the financial impacts associated with bringing up a child (on average it costs £153,679*) are substantial. The phrase, “bank of mum and dad” does not sound unfamiliar with many and with university fees at a all time high, the majority of universities charges £9,000 per annum for a undergraduate course, the abolishment of the maintenance grant for poorer students from September 2016 and with soaring property prices it is no wonder that parents are worried about their children’s future.
In recognition of these hurdles in life, the Government launched the Child Trust Fund (CTF) in 2005 as a means for getting parents to save for children’s future. Every child that was born between 1 September 2002 and 2 January 2011 had a CTF and the Government gave a £50 or £250 voucher (depending on when the child was born) towards the CTF. Three types of account were available: Cash, Stakeholder and Non-Stakeholder.
The Government introduced the Junior ISAs (JISA) in November 2011 to replace the CTF scheme. These JISAs are only eligible to children who are under 18 years old (born outside the period between 1 September 2002 and 2 January 2011), a UK resident and do not have a CTF. There are two types of JISAs that are available for children: Cash or Stock and Shares. Like the adult ISAs, any savings and returns that are placed within the JISA are tax free. For the tax year 2015-2016, the JISA’s current contribution limit is £4,080. A child can have a Cash as well as a Stock and Shares ISA and invest the allowance in a combination of the two accounts. Because the child is under 18 years old, parents or people who have parental responsibility (“registered contact”) must open and manage the account for the child. This means they can choose whether the child opens a Cash ISA or Stock and Shares ISA (or both). It is worthwhile mentioning that the child can take control of the account when they’re 16 years old but can’t withdraw money until they are 18 years old (there are exceptions in cases of death or being terminally ill). On their 18th birthday, the JISA will become an adult ISA.
As mentioned before, the introduction of the JISA was to replace the CTF (the scheme is now closed). The Government has announced that children who have a CTF are allowed to transfer their money from that to a JISA from 6 April 2015. Both of these products were introduced with an aim of encouraging saving for a child’s future– so are there any reasons why a parent should help their child transfer the CTF to a JISA?
For parents who opened a Cash CTF, in choosing a product provider, one of the things they would consider is what interest rate they offered. Because the CTF scheme is now defunct, the best interest rates offered with a CTF are typically less competitive than what we see offered for a JISA. For example, Ipswich Building Society offered 2.4% interest (12 month period) for a Cash CTF compared to Nationwide who offered 3.25% interest (12 month period) for a Cash JISA. Investing in a Cash ISA can be suitable for people who would like to see a fixed stable return for their child. However, interest rates can vary after a certain period and so it is worth keeping a note of when that initial period expires.
It is estimated that out of the 6.1 million CTFs that were opened, around 80%**of these accounts were stakeholder accounts. With this type of account parents were able to invest in the market but there were restrictions in the type of products they could invest in. In addition to this, unless the registered contact instructed otherwise, the stakeholder account is subjected to the “lifestyling” strategy. This strategy aims to reduce risk when the child reaches 13 years old year on year until the child reaches 18 years old. This is done by gradual switches from “more risky” funds to “less risky” ones such as Cash. Charges are capped at 1.5% of the value of the fund for each year as long as it is held.
In contrast, it is not compulsory to have the lifestyling strategy when investing through a Stocks and Shares JISA. With the JISA, you decide on where and how you invest the money and can switch funds at any time. Stocks and Shares JISA are available on platforms and the associated fees are typically more competitive than investing in a CTF.
As well as the charges, there is generally less choice of products available if invested within a CTF. For example, OneFamily only offers three funds available within a CTF; this is in comparison to the flexibility of investing into any funds, shares, investment trust provided by a provider who offers a Stock and Shares JISA.
Saving for a child’s future is a long term investment – and so it may be worth exploring what returns they will get from a Cash ISA and consider whether this is satisfactory. Whilst a Cash JISA provides a guaranteed interest rate within a specific period, this may not be in line with inflation and so over time the balance of the account will be worth less.
As shown on the graph below, historically, investing in stocks and shares has given greater returns compared to saving in a Cash account. Whilst investment in a Stock and Shares ISA may provide greater returns, it is important to note that the returns are not guaranteed and you may get back less than what you’ve invested.
Overall, the JISA is a great tax efficient way of encouraging parents (and even grandparents!) to save for the child’s future. By doing this, it can help the child save for the special life events they are bound to experience as they enter into adulthood.
You can find out if your child has a CTF through the HMRC website here
Stock and Shares JISAs are available through Willis Owen – more information can be found on our website here
*Source: (to raise a child up to 18 years old) Child Poverty Action Group