What is a Child Trust Fund?
Giving a child a financial start in life as they enter adulthood at 18 is something most parents, grandparents or guardians are keen to do. In 2002, the Government of the time also decided this was an excellent idea and set the Child Trust Fund as a long-term tax-free savings account for children.
With the first beneficiaries of the Child Trust Fund scheme turning 18 in 2020, the Government took the decision to close the scheme in 2011, directing people instead to apply for the replacement scheme, a Junior ISA. The last Child Trust Fund accounts will mature in 2029.
What is a Junior ISA?
An Junior Individual Savings Account (ISA) is a way to either save or investment money on behalf of a child under 18, which allows them to earn growth as interest on the savings, capital growth or dividend payments without incurring a tax liability.
There are 2 types of Junior ISA: A Junior Cash ISA or a Junior Stocks & Shares ISA, and your child can have one or both types. While the money held in the ISA belongs to the child, both parents or guardians with parental responsibility can open and manage the account.
The child must be 18 before they can access the money, however they can take control of the ISA account from 16. They can make decisions from 16 about the fund and choose to move the funds into a Junior Stocks and Shares ISA or to an alternative fund provider.
You are not allowed to have a Child Trust Fund and a Junior ISA open concurrently; however, you can choose to transfer the funds held in a Child Trust Fund to set up a Junior ISA.
How do I find my existing Child Trust Fund?
When the Government lunched trust funds for children, parents either opened these up themselves for their child, or HMRC set up a trust fund on their behalf.
Over time, it is estimated by The Share Foundation that over two million child trust funds have been lost to the intended recipients because they are either unaware of the trust funds existence, or the person setting up a trust fund failed to make sure that recipients address details were kept up to date.
The good news is that locating a trust fund for children of any age enrolled into the scheme is pretty easy, even if you don’t know who set up a trust, the date the trust fund was opened, the type of trust funds set up, or the name of the provider used when setting up a trust.
Go to the GOV.uk website, where you will need to complete the HMRC form. You will need to make sure you enter your Government Gateway user ID and password, which you can create when you fill in the online form.
By completing the form, HMRC can check when the trust fund was set up and will send you details of the Child Trust Fund provider by post within three weeks of receiving your request.
Should I change by Child Trust Fund to a Junior ISA?
Despite the Government’s decision to wind down Child Trust Funds in favour of Junior ISAs, there is no requirement to transfer your money from one to the other. However, you may want to consider doing so to maximise the tax-free income growth a Junior ISA can achieve for your children’s savings in the long term.
Typically, a greater choice and better value can be achieved with a Junior ISA, whether it is higher interest rates on their cash accounts or lower annual fund management charges.
It is particularly important that you fully investigate and understand the risks, benefits, and associated costs before you switch to a Junior ISA as you cannot transfer back to a Child Trust Fund once you’ve switched. An expert Financial Adviser service like Redwood will ensure you are getting the best possible deal in terms of investment returns and fees.
How to transfer a Child Trust Fund to a Junior ISA
From April 2015, the option to convert a Child Trust Fund into Junior ISA was introduced by the Government, which provided the flexibility for anyone who opened a Child Trust Fund to either keep paying into the same fund (up to the annual tax allowance), switch the existing account to a new provider, or transfer the savings into a junior ISA.
You can transfer a cash-based Child Trust Fund to a Stocks & Shares Junior ISA or vice versa. Similarly, investment-linked Child Trust Funds can be converted to cash-based Junior ISAs or another investment account.
We would always recommend that you seek financial advice from experts like ourselves before committing to any changes to make sure that you are optimising your opportunities for tax free growth on the money invested. It should be noted that once you have switched from a Junior ISA, it will not be possible to switch back to a Child Trust Fund account.
You should also be weary of scammers operating in this part of the financial market with many and varied scams, which are designed to get hold of your money. Again, specialists such as ourselves have broad market access and can help you find the best Junior ISA to transfer your Child Trust Fund into, based on your attitude to risk, investment experience, needs and circumstances.
Will I have to pay a transfer fee?
This usually depends on which type of trust you have currently set up. There are usually costs associated with switching from an investment-linked account, but not a cash based Junior ISA. Moving from a Stocks & Shares Child Trust Fund to a Cash Junior ISA, can incur dealing costs or stamp duty charges involved in selling the trust assets so you can make the transfer.
While typically lower than an investment-linked Child Trust Fund, an Investment Junior ISA is likely to have management and activity fees you will have to pay.
How to start a Junior ISA and where to invest it
There are many products available on the market and we would recommend that you seek professional advice before you commit to opening a Junior ISA. Choosing where to invest money for your children will depend on a number of factors, including the level of tax free income return you want the money to earn versus your attitude to the risks you may want to take with the money invested.
We would be delighted to help you through the selection process, just complete our Contact Form to request a call back from one of the team.
Who can pay money into a Child Trust Fund or Junior ISA?
Parents, appointed Guardians, family members and friends can all choose to contribute to a Child’s Trust Fund or Junior ISA. This can be one off payments or a regular deposit, provided that between them they do not pay more than the annual allowance rate into the account (£9,000 2020/21 tax year) each year. The start of the year is considered to be the child’s birthday.
The amount of money in a child’s Child Trust Fund does not affect any benefits or tax credits the child’s parent or guardian receives.
What can I do with my money when I am 18?
From your 18th birthday you can access the money in your Child Trust Fund or Junior ISA account. What you do with it then is totally up to you! However, before you go out and blow the lot on a new wardrobe of clothes or a holiday with your friends, you may want to take some time to consider your options.
The original concept behind both Child Trust Funds and Junior ISAs was to give young adults a start in life, whether that’s helping to fund your further education, a payment towards a first car, or something else that helps you move your life forward. For many young adults, the choice is often to continue saving their money.
Transferring their money from a Trust or Junior ISA into an adult savings account, can help their savings to continue to build up, grow faster and increase the savings pot, maybe towards that first home deposit!
The money in your Child Trust Fund could also provide an excellent foundation for building a ‘rainy day fund’ to make sure you have money available for emergencies or sudden expenses, like an unexpected dental bill, or to supplement your income if you find yourself out of work.
There are a wealth of savings and investment products out there and the best way to tap into the one that is right for you is with expert financial advice from a Financial Adviser firm like Redwood.
What happens to the money if a child dies or is terminally ill?
It is a sad fact of life that some children will not make adulthood, either through illness, accident, or other misfortune.
The person opening the account on behalf of the child originally is known as the Registered Contact, and they are authorised to change the account, for example from a Cash to a Stocks & Shares Junior ISA, change the account provider, report changes of circumstances such as a change of address, and take money out of a Junior ISA early if a child is terminally ill.
HMRC define ‘Terminally ill’ as: the child has a disease or illness that is going to get worse and is not expected to live more than 6 months.
In these circumstances, the Registered Contact must complete the Terminal Illness Early Access Form to advise HMRC that your child is terminally ill and that you wish to take money out of their Junior ISA.
HMRC will inform you if your request to take money out of your child’s Junior ISA has been approved.
In the unfortunate event that your child dies, any money in their Junior ISAs will be paid to whoever inherits their Estate. Typically, this would be one of their parents, but it could be their spouse or partner if they were over 16 and married or in a civil partnership.
You are not required to report the death to HMRC; however you should inform the account provider so they can close your child’s Junior ISAs. They are likely to ask that you provider proof to do this, for example a copy of the death certificate.
I have been in care; do I have a Child Trust Fund and who is the Registered Contact for me?
Both the Child Trust Fund and the Junior ISA schemes for children and young people in care is run by The Share Foundation, who also act as the registered contact for Child Trust Fund accounts for children and young people who are care-experienced and manages them for the child or young person.
Around two months prior to their 16th birthday, the child will be written to by The Share Foundation to explain how they can now become the registered contact for their Child Trust Fund account.
What if my child lacks the mental capacity to manage their Child Trust Fund or Junior ISA?
In order to take control of their account from age 16, young people must have the mental capacity to manage the money in their Child Trust Fund or Junior ISA.
Without it, their parent(s)/ guardian(s) / carer(s) will need to apply to the Court of Protection to request to be appointed to act as the child’s Deputy. A Deputy can manage and make day-to-day decisions about someone’s finances. Many parents are shocked to learn that without this and despite their child’s lack of mental capacity to act for themselves, they are unable to manage the account when their child turns 18. As far as the law is concerned, this is the age the child legally become an adult and the money belongs to them.
The process of applying to the Court of Protection can be complex, time consuming, stressful, and expensive, especially if you need to involve legal services, which can run into several hundreds of pounds.
Child Trust Funds and their successor, Junior ISAs have proved to be an excellent vehicle to encourage people to help their children and or loved ones to get on the savings ladder from the earliest stages of their life. Building a nest egg, some growing to tens of thousands of pounds, has given a whole new generation a wonderful start in life, hopefully a saving philosophy of their own, and control over their accounts from a relatively young age.
The Junior ISA scheme has built on the foundations laid by its predecessor, providing a wonderful opportunity for parents to put away a regular sum, lump sums and even money gifted from their child’s birthday’s and Christmas’s, to ensure that any growth in the capital invested will be free of tax!