In the coming years, the cost of living could well be even higher than it is today, especially for younger people who have yet to build wealth. With this in mind, we look at two tax-efficient investment options that could help give today’s children a financial steppingstone for adulthood.
University, housing deposits, driving lessons: the costs faced by today’s young adults are rising by the year.
One of the best ways for parents or guardians to help their children tackle these challenges is to begin investing when their children are very young.
The taxman gives prudent parents a hand by offering a tax-efficient structure for children’s investments or savings that works in a similar way to the adult ISA. Just like with an ISA, when you get no tax charged on gains up to £20,000, children have their own £9,000 allowance.
There are two different tax-efficient accounts for children: the Junior ISA (JISA) and the now defunct Child Trust Fund (CTF). The two accounts are similar, and both offer parents the chance to get ahead with providing for their children. But there are key differences too, not least that you can no longer open a CTF for your child.
The benefits of a JISA or CTF for your children
Investing for your children could potentially give them a head start by the time they reach adulthood, though returns are not guaranteed. We all know that it is easier to aim towards a goal if you start as early as possible and keep your investments separate from day-to-day spending.
Junior ISAs (JISAs) and existing Child Trust Funds (CTFs) allow parents to allocate money towards their child’s future from birth and to choose whether to put the money into cash savings or, as with the case of the Nutmeg JISA, into investments.
The major advantage of these two accounts is the tax-efficient status they confer on your money. While in a JISA or CTF, your child’s money can grow without attracting either income tax on interest or capital gains tax if shares increase in value. This remains until the money is withdrawn by the account holder, when they become an adult. This nest egg cannot be touched until the child is 18 (though there are some exceptions to this which we’ll cover shortly) so there is no temptation to spend it before then. Parents know that the money will be there for when their child becomes an adult.
JISA vs CTF
Why are there two different accounts? The answer lies in history.
Under previous government policy, every child born in the UK between 1st September 2002 and 2nd January 2011 received a CTF, complete with a government contribution to start off their savings. The contribution varied depending on circumstance but was up to £1,000.
Parents could choose where to open these accounts, and whether to put the money into cash or stocks and shares. But not all parents chose to open accounts for their children. In the cases where they did not, the government opened them automatically, and invested them in a combination of stocks and shares known as a ‘stakeholder’ account.
These accounts still exist, whether parents have added to them or not. Your child may even have a CTF without you realising it, and you could maximise their future savings by taking charge of it now and contributing to it once a month, quarterly or on special milestones, like birthdays.
CTFs were phased out in 2011 and it is no longer possible to open one; the first matured in 2020 and the last will mature in 2029. However, parents still wanted to save and invest in a tax-efficient way for their children – and so the Junior ISA was born. The two accounts are close cousins, but they are not the same.
- Money for a child can be invested in stocks and shares or saved in cash.
- No money can be withdrawn from the accounts, except in some very limited circumstances, such as critical illness or death, until a child reaches 18.
- Savings or investments can grow tax free within both accounts.
- Only a certain amount (currently £9,000) can be added to either account each year.
- From the age of 16, the child can take control of their account, although it cannot be withdrawn.
- The money is handed to the child at 18, and the child then has control over the money.
- A CTF was automatically opened for many children, whereas a parent or legal guardian must choose to open a JISA.
- A CTF contains a government contribution; a JISA does not.
- A parent can choose to open separate stocks and shares and cash JISAs for their children, but a child can only have one CTF.
- At 18, a JISA converts automatically into an adult ISA, whereas a CTF either pays out or remains in a ‘protected account’ from which it can be transferred into an adult ISA if the child so wishes
- A product known as the ‘stakeholder CTF’ exists for CTFs, which has extra rules around the type of investments that can be held, but there is no corresponding JISA product.
Can I have a JISA and a CTF?
If your child already has a CTF, he or she cannot also have a JISA.
However, you can choose to transfer the existing CTF into a JISA, either with the provider who already holds the CTF or with a new provider, such as Nutmeg. With providers like us that offer investment products, you can then add more to the JISA, and change its investment style and risk level.
There is more information on how to do this later in this article.
Why open a JISA?
Since both structures have similar tax advantages and limits, you might wonder whether it is worth the trouble of making a transfer from a CTF to a JISA. The main reason people make this change is to access the greater level of choice within the JISA market.
There is little competition in the CTF market because there are no new accounts. This means that the options are narrower for parents who want to make the most of their children’s savings or investments.
It is important to note that once you change your account from a CTF to a JISA it cannot be changed back again, so you need to be very sure that you are happy with the deal you are getting.
Is the amount you can contribute in a CTF different to a Junior ISA?
You can save the same amount in a CTF as you can in a Junior ISA. This annual JISA allowance, which is currently £9,000, varies each financial year.
Putting your money into cash is the safest option in terms of guaranteeing that you will not lose money. However, if you invest the money into stocks and shares, there is potential for greater growth particularly as you are investing for the longer-term. However, be aware that past performance is no guarantee of future returns and the value of the portfolio can go down as well as up.
How to transfer a CTF to a JISA?
To transfer a CTF to a JISA you will need to be the registered contact for the fund and to know your child’s unique reference number.
If you did not open a fund and think one has been opened automatically for your child, you can use the government’s service here to find it. Once you have the details, you will be able to transfer, but check there is no exit fee with the current provider that might eat into returns.
The next step is to pick a new provider for your JISA. It is fine to shop around, to find a product that meets your ethical criteria, is suitable for your risk appetite and is good value for money. You may want to consider the Nutmeg JISA, which was awarded Best Buy JISA 2022 by Boring Money.
Not all firms offer CTF to JISA transfers, so check on potential new providers’ websites whether they offer this service. If they do, there should be a form to fill in that gives clear directions.
The transfer should be completed within 30 days.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. To open a Nutmeg JISA, your child must be under the age of 16 and funds cannot be withdrawn until your child turns 18. Tax treatment depends on your individual circumstances and may be subject to change in the future. If you are unsure if a Junior ISA is the right choice for you and your child, please seek financial advice.