The New Junior ISA vs The Old Child Trust Fund - Overlap

There is no doubt that the new Junior ISA has been brought in to fill the gap left by the old Child Trust Fund (CTF). They both perform the same function - providing an incentive for parents to save on behalf of their children; to build them a nest egg for their future. But how do the two investment vehicles compare and why has the CTF been replaced by its new-fangled successor? The first part of this article looks at the overlaps between the plans; part two addresses the differences in more detail.

Purpose
The new Junior ISA and the now closed CTF both share a common aim: to encourage parents and guardians to save money for their children so that when they reach adulthood the money awaiting them can be used to kick start the rest of their lives. By providing a tax exempt vehicle where the invested monies belong to the child, the idea is that the funds will be securely ring-fenced whilst given the best chance to grow successively as the child grows.

Term
In both cases, as suggested above, the money put into these plans is locked away until the child turns 18. No-one, neither the parent nor child can access it until that point with the only exceptions being in the event of extreme circumstances such as the death of the child or a terminal illness.

Tax
The Junior ISA and the Child Trust Fund share the same tax breaks in that they are not taxed on any income generated by assets within the plans, whether it be interest payments on cash deposits and bonds, or dividends on stocks and shares. If those assets grow significantly they will also avoid being subject to capital gains tax (CGT) as they would if they were held outside of an equivalent tax exempt savings vehicle.

Junior ISAs and CTFs aside, children are subject to the same income tax thresholds as adults where their income would only become taxed if it exceeded £7,475 in a given tax year. However, it is worth bearing in mind that other child savings accounts, for example, can still be subject to tax on income which exceeds £100 per year for any monies donated by an individual parent or stepparent (to prevent parents using these accounts for personal gain). Neither the CTF nor the Junior ISA have these £100 income caps.

In addition, an important consideration for parents or families on lower incomes is that when the times comes at which the child (then adult) can, if they wish, access the funds from these plans, the new influx of money won’t affect the calculation of any benefits that they may be receiving.

Subscriptions/Contributions
Although the CTF previously had a contribution limit of £1,200 per year it has now been raised to match the subscription limit of Junior ISAs. The increase dating from the point at which the ISAs were launched on 1 November 2011 means that each type of plan will now permit up to £3,600 to be contributed (subscribed) each tax year.


Management
The CTF and the Junior ISA must be run/managed by a single registered contact who will usually need to be either a parent or guardian. This person will then be responsible for making all decisions about how and where the funds in the plans are invested. In the case of the CTF, a voucher which entitles the child to an initial government donation (usually £250) is sent to a parent at the outset and this person is then responsible for setting up the account using the voucher. Similarly the registered contact for a Junior ISA will be the parent/guardian who opens the child’s first ISA. The registered contact in both cases will be responsible for the account until the child turns 16 when for the CTF they will and for the Junior ISA they can, if they wish, take over the running themselves for the remaining two years. The plans and the money therein, however, are always the property of the child even before they turn 16 and cannot be accessed by the registered contact at any stage.

As you can see there are a number of significant similarities behind how the CTF and the new Junior ISA are run and why they exist as savings options for parents and children in the first place. So all this does beg the question as to how the new Junior ISA is different to its predecessor and why the original CTF was scrapped in favour of the new investment vehicle. For more information on this see part two of this article: The New Junior ISA vs The Old Child Trust Fund - The Differences.