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Child trust funds versus Junior Isas

This article is part of
Guide to Child Trust Funds and Junior Isas

According to the Tax Incentivised Savings Association, at the end of 2013 there were more than 6.1m child trust fund accounts with £4.8bn invested, as opposed to 300,000 Junior Isas with £500m invested.

CTFs

CTFs were a long-term tax-free savings account for children automatically opened for every child born between September 2002 and January 2011. The scheme was introduced by the Labour government in 2005.

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Each new account created for a child born after September 2002 was credited with a starting fund of £250, though this was reduced to £50 in May 2010 when it was announced the scheme would be phased out the following year. Children of low income families could receive double the contribution from the government.

All payments into child trust funds were stopped in January 2011. Money can still be paid into existing accounts.

The money was provided in the form of a voucher to the person claiming child benefit which could be used to open an account, with HMRC setting up an account automatically if the voucher was not used. A second voucher was to be issued at age 7.

Parents of children eligible to receive a child trust fund can From July of this year add up to £4,000 each tax year to the account. There is no tax to pay on the amount held in any type of child trust fund and it will not affect any benefits or tax credits received by the parent.

There are three main types of child trust fund account:

1) Stakeholder accounts have to follow government rules, including investing the money in a number of companies not just one, and the money must be moved to lower-risk investments when the child is 13.

2) Share accounts invest your child’s money by buying shares in companies. The value can go up or down.

3) Savings accounts work in the same way as a bank or building society account. Money invested is secure and earns interest.

Although the money in the account belongs to the child, they will not be able to withdraw funds until they have reached 18.

Jisas

Launched in November 2011, the Junior Isa is a tax-efficient savings account designed for those aged less than 18-years-old. It was created following the government’s decision to scrap the child trust fund for children born after 3 January 2011.

Unlike the CTF, the Junior Isa is not opened automatically for a new child and does not receive a free contribution from the government. As a result, it is down to the parent to open the account on behalf of a child.

A Junior Isa works in a similar way to an adult Isa and parents can invest up to £4,000 each tax year until the child’s eighteenth birthday.

According to HM Revenue & Customs, there are two types of Junior Isa:

1) A cash Junior Isa, i.e. you will not pay tax on interest on the cash you save.

2) A stocks and shares Junior Isa, i.e. your cash is invested and you won’t pay tax on any capital growth or dividends you receive.