“It’s time to get angry about child trust funds”, wrote Merryn Somerset Webb at the end of February. The previous Labour government introduced the scheme with a £250 incentive (paid for by the taxpayer) to encourage parents to save on behalf of their children. Up to £3,600 per year could be set aside tax-free either as cash, or in the form of stocks and shares for under-18’s. But although this scheme sounded sensible enough, it rapidly became apparent to anyone who opened a CTF that fund choices were limited and investment costs high.
So, in one of his first moves as chancellor, George Osborne abolished them and replaced them with the superior junior Isa. However, he left many investors, including Merryn, fuming by barring access to the new Jisa (basically a children’s version of the adult Isa) to anyone who had already set up a CTF. As Merryn wrote at the time, “children born after January 2011 and before September 2012 have access to a tax-efficient and flexible long-term savings product… while those born in the intervening months are stuck with inflexible, expensive products that self-destruct when they hit 18”.
Thank goodness, then, that in his last Budget Osborne saw sense. In one of his few helpful moves for savers, the chancellor has proposed that money locked in CTFs will (albeit probably not until the end of this year) be allowed to be switched into a Jisa. Many parents will take advantage. Although a Jisa doesn’t come with any £250 government freebie at the start, it does come with better savings rates and lower charges.
We used to dislike Jisas because they didn’t offer market-beating interest rates, but now, for example, savers can earn up to 6% in a Halifax Jisa (provided their parent also has a Halifax account). By comparison, the best rate for funds in a CTF is 3.05% (with Furness Building Society). Then there are the fees – a typical CTF that allows you to hold stocks and shares will come with an annual management fee of around 1.5%, while a simple tracker fund held within a Jisa costs more like 0.5%. Finally, the choice of Jisa providers is much wider. As with a CTF, up to £3,600 can be invested every tax year into cash or shares, with all returns (whether interest on cash or dividends and capital gains on shares) earned tax-free. There is one caveat – when your child turns 18 they get control of the money, not you.