Does your child have a Child Trust Fund or Junior ISA nearing maturity? What does that mean, and what are next steps?
Firstly, let’s look at what both of these products are…
Child Trust Fund
This was a tax free savings scheme set up by the Government for all children born between 1 September 2002 and 1 September 2011. The Government then issued monetary vouchers which could be paid into the Child Trust Fund (CTF).
There were two CTF options – a cash fund or stocks and shares. There is an annual investment allowance, currently £9,000. The year runs in line with your child’s birthday, unlike ISAs which are dictated by the tax year.
Decisions around investment choice and which provider to choose would be made by somebody with parental responsibility, known as the Registered Contact. Once your child reaches the age of 16 they are allowed to take over managing the account themselves.
The CTF scheme is no longer available. And we are now at the point where a number of the earlier CTFs are maturing, as children reach the age of 18.
If you believe your child has a Child Trust Fund, but cannot find the details, this HMRC tool should help: https://www.gov.uk/child-trust-funds/find-a-child-trust-fund
Similar to a regular ISA this is also a tax efficient investment plan, and like the CTF has an annual allowance of £9,000. ISAs are built around the tax year, so the allowance is from 6 April to 5 April of the following year.
Again, a Junior ISA can be invested in cash or stocks and shares. You can have a combination of both types, provided you do not need exceed the annual allowance.
If your child currently has a CTF this can be transferred to a Junior ISA, but you cannot transfer it back again, if you change your mind.
What happens when CTFs and Junior ISAs mature?
By the time it matures your child will be 18 and is therefore legally allowed to make their own decision about what to do with the money.
It depends on how much has been invested each year, and where it has been invested, as to how much is in the fund. But no matter what the total there are choices to be made.
If you do nothing, a cash CTF or Junior ISA will be automatically transferred to an adult cash ISA. That is likely to be within a similar portfolio and will be the same provider as the previous product. So, if you have been disappointed with the performance you need to take action now.
Transferring to a regular ISA product is one of the most tax efficient choices. However, you and your child should determine what is the right ISA for them. Whether it is cash or stocks and shares depends on your attitude to risk, which is something we have covered before.
Moving to a standard ISA product means you can then enjoy the increased annual allowance, which is currently £20,000 – again this is across the tax year.
Of course, your child isn’t obliged to re-invest the money. They are perfectly at liberty to just spend the money as they wish.
However, this is the perfect time to start financial lessons, if you haven’t already. To talk about the importance of saving towards bigger goals such as a car or a deposit for a first house or helping towards time at university versus the immediate gratification of spending a windfall now.
Talking your child through the options, the risks and the upsides is important.
We are huge fans of whole family financial planning, and really enjoy starting financial discussions at an early age to appreciate the importance of money and what can be achieved.
This feels like the perfect time to introduce a financial adviser to help talk through any concerns. Naturally, we’d love to help, if you’d like to arrange a meeting.
To talk about next steps for a Child Trust Fund or Junior ISA, please contact us on 01344 875 310.