Should you move a Child Trust Fund into a Junior ISA?

Young savers could be missing out on lower fees and higher returns by leaving money in a child trust fund (CTF) rather than transferring into a Junior ISA (JISA).

CTFs were a tax-free savings account available to children who were between 1 September 2002 and 2 January 2011. These accounts were given a funding kickstart from the government with an initial deposit of £250. The idea was to build a savings habit for children early on, letting the accounts earn savings interest or invest in the stock market before they could access the funds at age 18.

CTFs were replaced by Junior ISAs in November 2011, pushing responsibility onto parents to set up their own savings for their children. This also made CTFS ‘zombie’ accounts as providers shifted their focus onto Junior ISA.

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But millions of savers still hold CTFs. The oldest children on the scheme turned 18 in September 2020 and around three million accounts have matured since then.

What’s the difference between a Child Trust Fund and a Junior ISA?

Both CTFs and a Junior ISA aim to encourage people to start saving with tax-free cash and stocks and shares versions.

You can’t open a CTF anymore but they were offered by banks, building societies and asset managers. If you are a parent of a child who was eligible for a CTF but did nothing with the money, the government will have put it into a default account for you which you will have to track down – there is currently £1.6 billion sitting in unclaimed CTFs.

Similarly, Junior ISA are offered by banks and you can open a stocks and shares version with investment platforms such as Hargreaves Lansdown and AJ Bell.

The annual contribution limit of £9,000 is the same and both offer the same tax advantages with no UK income or capital gains tax to pay on any returns.

There are differences when it comes to account administration. Most Junior ISAs can be opened and managed online, while there may be CTFs where you can only make changes and find out details via the post or over the phone.

Since CTFs are no longer available, providers will also be putting greater resources into Junior ISAs, meaning the fund options for investment are also going to be bigger.

For both accounts, the money is locked away until the child turns 18, at which point they become the legal owner of those assets.

While Junior ISA become adult ISAs at maturity, CTFs don’t change and the money can just stagnate until action is taken, which is another reason to consider moving your money.

Other differences emerge when it comes to returns and charges.

Should you move a CTFS into a Junior ISA?

JISAs have more to offer than CTFs, says Alice Haine, head of personal finance for Hargreaves Lansdown.

“A child can only hold one CTF and switching between cash and investments may require a transfer to another provider.

“With a JISA, a child can hold both a cash Junior ISA and stocks and shares one simultaneously, with the savings limit split between the two as desired. So there can be benefits to transferring across.”

Money left in a cash CTF could be getting a poor return compared with JISAs as banks and building societies have little incentive to offer decent rates, plus the rate tends to drop after maturity.

High inflation could also mean the lower returns in a CTF mean you are losing money in real terms.

How do the returns on a Junior ISA compare with a CTF?

Product choice is wider when it comes to choosing a cash Junior ISA and returns can be slightly higher.

For example, savers in Yorkshire Building Society’s now-closed CTF are getting a rate of 3.65%, which drops to 2.35% at maturity.

An average CTF pot of £2,200 would earn £80 of interest in a year or £51.70 if it had already matured.

In contrast, Leek Building Society has a top cash JISA rate of 3.85%.

The typical £2,200 CTF pot would earn a little more interest at £84.70 in a cash Junior ISA in a year or around £30 more under a matured interest rate.

A bigger difference emerges if you are investing.

This is where charges can hit your CTF returns harder compared with stocks and shares Junior ISA.

While cash CTFs don’t have charges, millions of investment accounts were opened on behalf of parents by HMRC as default stakeholder options – typically backing tracker funds – that had fees capped at 1.5% per year.

Charges can be lower for a Junior ISA plus there are typically wider investment options beyond UK trackers that were offered by CTFs.

A 1.5% fee is expensive for what’s typically a basic UK tracker fund, says Antonia Medlicott, flounder of Investing Insiders. “Over 15 years, the average fund in the Investment Association’s global sector grew by around 240%, while stakeholder CTF returns tracked closer to the far more modest bond and mixed-investment sector averages.

“That’s two decades of compounding working against these children rather than for them.”

A modern Junior ISA can cost as little as 0.15% to 0.35% depending on the investment platform before underlying fund charges.

”This isn’t a marginal saving, it’s the difference between a fund that’s barely kept pace with inflation and one that’s actually done its job.”

How to transfer a CTF to a Junior ISA

Once you find the best Junior ISA to transfer the funds to, you will need to complete a transfer form with the new provider.

The transfer can only be completed by the registered contact, usually the parent or the child once they turn 18.

You will need to provide details such as your child’s Unique Reference Number, which you’ll find this on your annual CTF statement as well as the details of the account type and the provider. If you have lost the details, you can use HMRC’s CTF finder at gov.uk.

A transfer can take between two to six weeks and some platforms may even pay cashback for moving money across. Not all providers let you transfer a CTF into a Junior ISA.

You cannot hold both, so the CTF must be transferred in full and closed. This means that before moving, parents should compare charges, investment choice, performance and any valuable existing features.