Junior ISA to Replace Child Trust Funds

Junior ISA to Replace Child Trust Funds

by Rebecca Hall on 31 Mar, 2011

In the wake of cuts to many other services, Child Trust Funds are now on their way out. Aiming to recoup the £500 million per annum that went into the government incentivised schemes, the Coalition will from Autumn this year support an all new investment product, the Junior Isa which will receive no direct government funding.

For parents this means a loss of the £500-£1,000 which the government placed annually into Child Trust Funds (CTFs) and which reached over 5 million children since 2005. This may be a bitter pill to take in the face of the cuts coming against other services in particular for families who relied upon this money to provide a nest egg for children who went on to employment or further study.

The government has also suggested that parents who currently invest via a CTF will not be able to transfer across to the new Isa system although it is hoped that the informal consultation that is ongoing will change this position by the Autumn.

Yet it is not all doom and gloom. The new scheme will continue to allow parents to invest tax free for their children at up to £1,200 per annum and those parents currently holding CTFs will be allowed to continue to contribute up to £1,200 per year to their CTFs albeit without further state contributions. A cap is currently being decided by the government but it is expected to be either £3,600 or £5,100 which represents the caps for stakeholder pensions and adult cash Isas respectively.

The new scheme will also be back dated to allow those children over 8 who never qualified for a CTF to open one of the new Isas. This should ensure that nobody falls through the gap and remove the uncertainty faced by these families.

In terms of the investment vehicle the new Isas will offer, they will be broadly similar to the adult Isas, with parents able to select to invest in stocks of shares as well as bank or building society savings accounts.

The Isas will also be fully shielded from tax unlike bank accounts which are subject to the ‘£100 rule’. That rule provides that if a child generates more than £100 in a year on money provided from its parents then that money would be taxed at the parent’s income tax rate.

Whilst sharing these similarities with other Isas, the Junior Isa will not be accessible until adulthood which will either be set at 16, the age you can achieve an adult Isa allowance, or 18 when CTFs currently mature. At that point the fund will transfer entirely into the childs name who will be free to utilise it to whichever ends they prefer. Before that point investors will be allowed to transfer their Junior Isa to better-paying providers subject to any terms and conditions agreed to with their provider.

In sum the Junior Isas do seem to offer a strong alternative to CTFs whilst also being cost effective for the Coalition which would otherwise would have had to remove any semblance of a scheme.

About the Author

Rebecca Hall

Rebecca Hall worked as an independent mortgage adviser for 10 years before turning to financial journalism full time. She has strong links to the CAB advising families on mortgage refinancing.