Bridging The Disparity Between Child Trust Fund Accounts And Junior Isas

For many parents with more than one child there's a bit of a problem if you have

one child who was born during the period the government was running their Child Trust Fund solution, and another child or children born after this period who may be eligible for a children's ISA. What are the options, and how can you make sure that neither child is penalised compared to the other?

The government introduced their Child Trust Fund arrangements after 1 September 2002. This meant that any child born after this time would be automatically eligible for a Child Trust Fund account. As each child was born the government issued every single child with a voucher worth 250. For children whose parents were on very low incomes an additional 250 was also credited directly into the child's account.

The arrangement was that when the child reaches the age of seven the government would make a further payment of 250 into the account, increased to 500 for those children coming from parents on low incomes. The annual limit for a Child Trust Fund account was 1200. This was the maximum amount that could be credited to the account during any tax year. All gains, including interest, are tax-free. However, the only people who were able to credit the account were the child's parents.

This is in stark contrast to the Junior ISA arrangements. After the government ended the Child Trust Fund plan any children subsequently born became eligible for a Junior ISA, rather than a Child Trust Fund. At the same time, any child born during the time when the Child Trust Fund arrangement was in practice is not eligible for a Junior ISA. This means that many families have one child with a Child Trust Fund, and one with a Junior ISA.

The problem is though that the Junior ISA account has always had a maximum limit of 3600 per year, compared to the 1200 limit on a Child Trust Fund, and additionally the Junior ISA account offers a good deal more flexibility.

This flexibility includes the fact that anybody can make payments towards the account, including parents, grandparents, and even friends of the family. In addition to this advantage there is no restriction placed on what the funds in a Junior ISA can be put towards when the child reaches the age of 18.

Certain changes have been made to help to even up the differences between these two types of account. In the first instance the annual limits on the amount of money which can be credited to a Child Trust Fund has been increased from 1200 to 3600, the same as with a Junior ISA. Additionally there is now more flexibility with regard to the who can credit a Child Trust Fund account, and what the child can use that money for when they reach the age of 18.

However, there is still a worrying disparity between the Child Trust Fund accounts and modern junior ISAs. Many of the CTF accounts operating today offer rates as low as 1%, which is perhaps unsurprising when there is little incentive for providers to be very competitive since the government itself is no longer backing the project. Most children's ISAs are offering interest of around 3%, which means that children are clearly going to benefit from these much more.

The government has said that they are looking into providing facilities for parents to transfer their CTF accounts to the modern Junior ISA accounts, but at the moment there is no specific information on this. If you do have two children, one who has a CTF account and the other a Junior ISA, unfortunately there is no easy way of bringing both of these into line without paying more into the Child Trust Fund account in order to ensure the final outcome is roughly equal.

My advice is to look carefully at the rates being offered and consider transferring from one CTF provider to another, or simply look at alternative investment options for your child. It's also worth keeping an eye on any possible announcements the Treasury chooses to make with regard to resolving this unfair discrepancy between the two types of account.

by: Justin Arnold

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