Good news for young savers
Millions of children with obsolete child trust funds should soon be able to transfer them to more competitive junior ISAs.
There is some good news for the millions of children born between September 2002 and January 2011 who have money rapped in obsolete child trust funds (CTF) accounts. The government is finally undertaking a 12-week consultation on options for the transfer of CTFs into the more user-friendly Junior ISAs (JISAs) that supplanted them.
CTFs seemed a generous deal at first: every child born between those dates received a £250 voucher to kick-start a tax-free account, and additional contributions could then be made by parents, family and friends. CTFs could be cash, ‘stakeholder' (the default option, which automatically moves into less risky holdings from age 14, and has charges capped at 1.5%) or stocks and shares.
But following the government's decision to scrap these accounts for children born after January 2011, these young savers have suffered. while the amount that can be invested in a CTF has been brought into line with the annual JISA limit (£3,720 for the current tax year), the accounts themselves pale in comparison with the alternatives now available.
The problem for the CTF generation is that while they can switch into other CTFs, they can neither switch their existing savings into a JISA nor open a new one. As a result, many are trapped in ‘zombie' accounts. There is no need for CTF providers to compete, so deals deteriorate.
Keith Evins, head of retail marketing at JPMorgan, says: "The CTF was not a bad product in its day. The real disadvantage to CTF holders has come from the failure to integrate the old scheme into the new one at the outset. CTF investors have had to sit by and watch as providers offered better interest rates or lower charges on their JISA products to attract new savers."
So, for example, there are fewer cash CTFs on the market, most of which tend to pay lower rates than cash JISAs. According to savingschampion.co.uk, only two (from Yorkshire and Furness building societies) pay 3% plus, whereas 13 JISAs pay between 3% and 6%. Some providers offering both types of account pay less on the one than the other. Skipton Building Society, for instance, pays 3.05%.
Lack of choice
When it comes to investment CTFs, part of the problem has been lack of choice. "Many providers didn't bother because the rules said if they wanted to offer a stocks and shares CTF, then they also had to offer a stakeholder account, which was just unwieldy," says Danny Cox, head of financial planning at Hargreaves Lansdown. As a result, there are only 14 stocks and shares CTF providers now on the market.
Costs can be high, too. "Annual management charges on stakeholder CTFs are capped at 1.5%," says Cox, "but they tend to be effectively tracker funds, so that makes them very expensive." In comparison, you could buy an HSBC tracker through a JISA for 0.27%.
Very few fund supermarkets offer CTFs, so initial charges don't tend to be discounted, either. For example, the Children's Mutual charges 3% for each top-up into its non-stakeholder funds.
Darius McDermott, managing director of Chelsea Financial Services, estimates that over 18 years and assuming the full allowance was invested each year, high initial charges could erode £7,500 from a CTF, compared with a 0% initial charge JISA bought through a fund supermarket.
In comparison, JISAs are flexible: the annual £3,720 allowance can be allocated to a cash or a stocks and shares account, or split between the two (whereas CTF investors had to opt for either one or the other).
The only condition is that each type of JISA (even from different tax years) has to be with one provider at any given time. Cash JISA investors therefore need to switch the whole account to get the best rates as necessary, while stocks and shares JISA investors can use a fund supermarket JISA to build up a portfolio of funds over the years.
Additionally, because JISAs are similar to adult ISAs, with no stakeholder products on the scene, there's a wider choice of accounts, which can be rolled straight into an ISA at 18, so they continue to grow tax-free.
So how are transfers from CTFs to JISAs likely to happen? It's all up in the air at present, says McDermott, "but most cash CTF providers also have JISA accounts, so it may be easier for them to merge the two together cost-effectively".
Harry Kerr, director of Avalon Investment Services, agrees: "Providers offering both stocks and shares CTFs and JISAs will be able simply to merge the two, as happened when PEPs [personal equity plans] were merged with ISAs."
But some CTF providers with limited fund choice and high charges are not offering JISAs. "In those situations, the process will require action on the part of the parent to get their CTF transferred to a decent JISA," adds Kerr. Some of those companies may decide to offer a JISA just to try to hold on to their CTF business.
What about CTFs holding small amounts? Providers are likely to want parents to move them, because they're not cost-efficient to run – but that could be quite a challenge. However, Evins says optimistically: "It's an opportunity to engage with parents and get them thinking about the right investment options for their children." Watch this space.
Where should you put your child's CTF?
If your child is approaching 18 and needs the money soon, then the security of a cash junior ISA (JISA) is the best bet. But what if you have a longer timeframe? You may worry that the unpredictable stockmarket could damage their nest egg; but history has repeatedly proven that over the long term (five to 10 years-plus), you'll do better investing in equities.
Figures from Chelsea Financial Services show that parents who invest the full allowance each year in cash (assuming interest of 3.25%) will have £147,754 for their child at 18, but the family that plumps for stocks and shares is likely to have £211,320 (assuming growth of 5% a year, less charges).
But be aware: JISAs from friendly societies or life insurance companies typically provide a much more limited choice of investments, sometimes just a single fund. However, brokers such as Bestinvest, Fidelity or Alliance Trust Savings provide access to a wide range of funds and investment trusts.
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%.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
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.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
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.
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.