Boost your kids cash by moving to a Jisa
April should be a very exciting month for millions of children - and not just because it starts with a glut of Easter eggs. Long after the chocolate has been eaten, children will continue to benefit from the introduction of a new rule that could help to boost nest eggs given to them by the government.
From 6 April, parents of the 6.3 million children aged between four and 13 who qualified for Child Trust Funds (CTFs) should, for the first time, have the option of closing those funds and moving their money to Junior Isa investments and cash deposits. This will enable them to take advantage of greater flexibility, lower charges and, hopefully, better returns.
The move has been widely welcomed by parents and the financial services industry. One commentator said the draft rules allowing these transfers were published last November to "an almost national sigh of relief".
CTFs resulted in children getting free money from the government, encouraged saving on their behalf, and also benefited from exactly the same tax breaks and savings allowances as Jisas. This makes it hard to understand why people would be glad to see the back of this tax-efficient savings scheme. So what went wrong?
Changing savings habits
CTFs were launched in 2005 by the then Labour government, with the aim of ensuring that every child had savings when they reached the age of 18. Eligible children – those born after 1 September 2002 - received an initial subscription worth at least £250, while some from low-income families received £500. These payments could be topped up with contributions from family and friends, and children received another £250 or £500 top-up from the government when they reached their seventh birthday.
Once money was paid into the trust funds, it could not be withdrawn until the child's 18th birthday. Despite, or perhaps because of, this lack of access to the cash, CTFs were lauded as the most successful product ever in terms of changing people's financial behaviour.
Research in 2010 by the friendly society Children's Mutual found that 30% of the children from households with income of £19,000 a year were having £19 a month saved for them.
It was the small amounts involved that proved to be a problem. Sylvia Waycott, editor of Moneyfacts.co.uk, explains: "CTFs have never been popular with banks or building societies, mainly due to the cost involved in setting them up compared with the often very small amounts of money invested in them."
As a result, when CTFs were launched 10 years ago, only eight out of 117 potential providers offered them. The lack of competition between providers resulted in low interest for the cash accounts and high charges and, in some cases, poor performance for the stocks and shares-based CTF funds.
Many parents showed a complete lack of interest in the schemes, with one in four even missing the 12-month deadline to invest their £250 voucher from the government.
The situation got worse when the coalition government took over in 2010. According to the Institute for Fiscal Studies, about 800,000 babies each year were receiving an account, at a cost of about £500 million including seventh birthday top-ups.
It was an easy target at a time when state funding for everything was tight. Creation of new CTFs and government payments into them ended in January 2011, and the scheme was replaced by the Junior Isa (Jisa).
The launch of Jisas made matters even worse for children who had money tied up in CTFs. Although the two types of scheme offer very similar benefits – the same tax treatment, the same annual allowances, the same choice of cash deposits or stocks and shares investments, and access to the money at age 18 - Jisas are regarded as a much more attractive proposition.
The choice of equity-based funds available through Jisas is far wider than those available to CTF investors, charges tend to be lower, and the interest paid on cash Jisas has consistently been much higher than cash CTFs. The Nationwide Building Society, for example, is paying just 2.1% on its CTF, compared to 3.25% on its Jisa.
The CTF has thus become a very poor cousin to the Jisa. But children who already had a CTF were not allowed to have a Jisa as well, nor have they been allowed to transfer money held in a CTF to a Jisa - until now.
Although legislation to enable transfers had not yet completed its journey through the Houses of Parliament at the time of writing, the Treasury said it was confident the new rule would be in place by 6 April – the start of the new tax year.
Danny Cox, a chartered financial planner at Hargreaves Lansdown, says: "Ever since the Jisa was launched, millions of children have been trapped in often expensive and limited CTF products. Finally, children have the option to break free of the CTF chains and transfer to modern and better Jisa products."
Parents can continue to add up to £4,000 each year to their children's CTFs. The year runs from the child's birthday and ends the day before their next birthday.
Some banks and building societies already offer the same rates of interest on their CTFs and Jisas. Others, including Nationwide, will be equalising the rates from 6 April, making it less urgent to move your child's money from a CTF straightaway.
But hundreds of thousands of parents are still expected to jump at the chance of moving their children's money. Financial intermediary Hargreaves Lansdown believes that the 20% of CTFs that have received additional contributions from parents and grandparents are the most likely to be transferred.
It thinks about 250,000 funds will be switched in the first few weeks and months.
Interest rates on cash Jisas are likely to change in April and May, as banks and building societies compete for new business, so it is worth keeping an eye on best-buy tables.
At the time this feature was published, Halifax was paying 4% on its Junior Cash Isa but a parent or guardian must also hold a Halifax Cash Isa. The Coventry and Nationwide building societies were offering the next best-paying Jisas, with an interest rate of 3.25% and no strings attached. The Coventry Jisa can be opened online, through branches, via the phone and the post, and accepts transfer in from cash and stocks and shares Jisas, as well as from CTFs.
Parents whose children's money is invested in stocks and shares will have a much wider choice of funds, and their decision should be guided by how far their children are from their 18th birthday and access to their cash.
Cox says: "For those with fewer than five years to go before age 18, a conservative approach is sensible. The Newton Real Return offers the potential for better returns than cash without the volatility of an all equity fund.
"With more than five years to go, an equity income fund should provide a good return, with the dividends generated an important factor in the overall growth. CF Woodford Income is perhaps the best example of equity income.
"For those with a longer term view of perhaps 10 years of more, with the appetite for higher volatility in pursuit of better returns, investors can look toward markets with the greatest potential for growth such as the emerging markets. First State Asia Pacific Leaders is a good choice here with a long record of consistent performance."
He adds that tracker funds, such as the Legal & General UK Index, may suit those looking for a low cost and simple approach and these are significantly cheaper through a Jisa compared to CTFs generally.
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.