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.
Having discussed the features that the old Child Trust Fund (CTF) and the new Junior ISA had in common in the first part of this article the following highlights some of the ways in which they differ an why the Junior ISA has been brought in place of the CTF.Availability
The most obvious discrepancy between the two plans is that the CTF is now closed to newborns, in fact any child born after 2 January 2011. As discussed in the first part of this article, children born between 1 September 2002 and 2 January 2011 will have been issued with a voucher which will have either been used by parents to open a CTF account or will have expired, in which case the HMRC will have automatically opened an account on the child’s behalf.
The Junior ISA, however, can be opened for any child born either side of the CTF’s active dates above. Thus, children born before the CTF was launched in 2002 can still have a Junior ISA opened for them whilst newborns since January 2011 are also eligible.
State Contributions
The most popular feature of the old CTFs is that, for most children, the government would have issued a voucher worth £250 to get the plan going. This initial kick start varied if the child was in a low income family, in which case they could receive up to £500, or if the child received its first child benefit payment after 3 August 2010 - when they were then only entitled to a donation of £50 as the government began to scale back its contribution. What’s more, the CTF also promised a second state contribution of £250 when the child turned seven, if that event occurred before 1 August 2010.
Unfortunately, the new Junior ISA comes with no such welcome, or the extra boost at the age of seven, which explains why parents have been more lukewarm about their arrival in the place of the more generous CTFs.
Investment Choices
The CTF, broadly speaking, came in three different guises which offered certain investment choices based upon the risk that the parent (registered contact) wanted to take on in search of higher returns on the investment. Essentially, as with most investment, the higher the potential returns, the high the risk encountered.
The default account, that treads the middle ground, is a Stakeholder Account, which was what children ended up with if the voucher expired before the parent managed to open an account for them. These accounts invest the funds into shares and bonds but are required by government rules to spread the risk across multiple companies rather than put proverbial eggs into single baskets. What’s more the providers of such accounts are required to switch the funds to low risk investments once the child turns 13 to safeguard the plan as the child approaches 18.
The most secure CTF option is a Savings Account which simply invests the funds as cash and therefore protects the capital of the investment whilst only providing limited returns in the form of the interest accrued on that capital. The riskiest option with the highest potential returns, is the Share Account which, akin to the Stakeholder Accounts, invest the money into stocks and shares but unlike such accounts, don’t have the government required safeguards. Therefore there is a higher level of risk involved although the length of the terms involved (18 years) should increase the chances of any losses being counterbalanced by gains in the long run.
Junior ISAs on the other hand, can consist of a cash element and/or a stocks and shares element, just as their adult counterparts do. As little or as much of the subscriptions can be put into each as the parent/child wishes. The variety between individual plans will result from the distinct offerings of each ISA provider, such as varying discounts in investment charges and access to different ranges of investments. In principle, the parent/child can manage what their plan invests into although some providers may link their plans to specific funds, like investment trusts, for which the fund manager will decide how the underlying investments are to be managed.
Options at Maturity
The Junior ISA further differs from the CTF in terms of what happens to it when it reaches maturity and the options that are available to parent and child when they turn 16. At age 18, both the Junior ISA and the CTF become available to the ‘child’ to do with as they see fit but if no other action is taken the JISA will automatically turn into an adult ISA whereas the CTF won’t.
At age 16 the Junior ISA gives children the option of taking over the management of the plan themselves however, the CTF requires that the child take over the management. Neither plan of course allows the child (or parent) to access the funds until the child is 18.
Why The Switch?
As implied previously, the main reason for the scrapping of new CTFs was their cost to the government. At a time when the national budget had been squeezed from every angle the coalition government took the decision to save themselves an anticipated £320m-plus a year that CTFs would have continued to cost. In terms of a state contribution to child savings, the government do still however forgo the taxes that would otherwise be raised on the income generated by the investments in the new Junior ISAs.
In summary, both the CTF and the Junior ISA each have their own advantages and disadvantages whilst broadly sharing the same purpose and goals. Ultimately, parents are unable to choose between them and are restricted to one or the other depending on when their child was born, but the new Junior ISA, for what it lacks in state contributions, does offer parents and children increased flexibility and savings potential.
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