If you want your child’s money to work hard for them you should consider transferring their child trust fund to a junior ISA. We explain why and how to proceed.
Child trust funds (CTFs) were long-term, tax-free savings accounts for children born between September 2002 and 1 January 2011. As many as 7 million children qualified and the government sent vouchers worth at least £250 to invest on the child's behalf.
So the children didn't lose out if their parents or guardians forgot to invest the cash, the government invested it for the child after a set period. That means, if you or your child was born in the period they were active, there will have been a CTF created for them.
Since CTFs have been withdrawn, parents and guardians have been able to open a junior ISA for their children. But what do you do if your son or daughter still has a child trust fund?
Child trust funds are a pretty stagnant savings vehicle. With the scheme closed to new entrants in 2011, there's not been a lot of incentive for providers to come up with innovative products since then.
Back in the day, CTFs were intended to give your child or children a financial leg-up, and they did thanks to various government vouchers and tax-free growth. Now that role has been taken on by junior ISAs, and the process of switching to them couldn’t be simpler.
Additionally, child trust funds were invested in the markets by default (although cash options were available - seeing the potential for falls as well as rises - while junior ISAs can be held as a traditional cash savings account as well as held in the markets.
If you want to move your child’s holdings to a potentially better-performing ISA you’ll first need to satisfy yourself that switching is the right decision.
Given money may have been amassing in your child’s CTF for over a decade, the decision to move it – however logical – is not to be taken lightly. This is because, under the rules, you can’t reverse a transfer or open a new CTF once you’ve moved the money to a junior ISA. Likewise, you can’t have a CTF and a junior ISA at the same time.
The good news is that the annual limit for child trust funds and junior ISAs is the same at £9,000 - so your child won't miss out on contribution levels if to decide to stick with a child trust fund.
Take time to look for the best options and speak to an independent financial adviser if you are still unsure.
If you’re set on transferring your child’s money away from a CTF you should search the market for the best junior cash ISA or junior stocks and shares ISA (also known as a junior investment ISA). Once you’ve identified some attractive propositions, check that your favoured accounts accept transfers from CTFs. Follow these steps if they do:
Contact your preferred junior ISA provider or visit their website and complete a transfer form. To do this you’ll need to have your child’s CTF details to hand.
Once the application form has been submitted the junior ISA provider will arrange for the funds to be moved from the CTF, which will then close. The process is the same whether you’re moving the money to a junior cash ISA or a junior stocks and shares ISA.
Only the registered contact for the CTF can request a transfer because children are not legally allowed to sign financial documents.
You can open a new cash ISA and a new investment ISA for your child each tax year, placing the money from their CTF between the two as you wish.
Moving investments from a CTF to a junior ISA may incur a dealer’s fee, or even stamp duty charges depending on the assets being sold.
Even if there isn’t a transfer-related fee, you can expect to pay activity and annual management charges, as you would with any other investment. For this reason, make sure you are aware of all charges before proceeding.
Switching two cash funds should be free, however.
Although your child can take control of their CTF at age 16, they must wait until they reach 18 before they can get their hands on the money.
The chances are their account will look very healthy if you’ve been saving for their whole life – and that will be exciting for your child. Needless to say, this makes it really important to discuss their options.
At 18 your son or daughter’s CTF will close, with the money either withdrawn or transferred to another account. It’s important to stress the fact that if the money isn’t transferred to another ISA the tax benefit will be lost.
It’s usually far better to transfer the balance to an adult ISA rather than move it to a standard account. This can be just a temporary measure while you and your child decide what to do long-term, but at least they’re not losing that all-important tax-wrapper.
In any case, if the CTF balance is healthy, you should consider approaching an independent financial adviser for impartial expert advice.
The last child trust fund was opened in January 2011, meaning almost all of their holders are at least in their teens. With this in mind, it’s reasonable to expect a fairly large number of people will have lost track of where their child’s CTF is, or even forgotten whether they’d opened one.
Fortunately, you won’t need to employ a private investigator to trace a lost CTF, as the government can do this for you for free. All you need to do is follow one of these steps:
Send a written request to Charities, Savings and International 1, HMRC, BX9 1AU
If your child is under 16 include your child’s Unique Reference Number on any correspondence. You can find this on letters from HMRC or the Department for Work and Pensions if you claim child benefit
If your child is age 16 or more include their National Insurance number
Once logged in to your personal Gateway page, follow the links relating to CTFs and enter your son or daughter’s information. HMRC will get back to you within 15 days with details of who manages your child’s CTF