Junior Isas, CTFs and more: How to save and invest for your children - and some of the best funds to pick

By This Is Money Updated: 03:15 EST, 13 April 2015


Piggy bank: Junior Isas help encourage long-term saving

Piggy bank: Junior Isas help encourage long-term saving

When it comes to saving or investing for children there are a number of different options depending on whether you want something tax efficient but rigid or flexible but liable for tax.

You can save and invest for your children in a standard account, but there are some slightly bizarre tax rules on this, explained below.

Ultimately, these mean that any savings or investment income generated above £100 per year from money derived from either mum or dad is taxed at that parent's tax rate.

Parents can save tax-free for their children up to the age of 18 through a Junior Isa which was launched in November 2011 to replace child trust funds.

Every year they have an allowance, it is up to £4,080 for the 2015 tax year.

There are also saving and investing plans for children that have fewer age and contribution limits but may charge income tax.

Outside a Junior Isa or CTF, the interest on most children's savings is paid tax-free. But there is a very big stumbling block which means parents and step-parents are restricted on how much they can gift to their child tax-free.

We take a look at the ways you can save for your children, how the schemes work and provide tips and guidance.

Junior Isa

Like a normal Isa, there is a cash and stocks and shares option for the Junior version, but remember, you are not investing for yourself, but for your child who will be able to access the money age 18.

No withdrawals are allowed until the child's 18th birthday, except in cases of death or terminal illness.

Upon reaching 18 only the child (and no one else) can withdraw the money.

HOW TO USE YOUR JUNIOR ISA ALLOWANCE

Cash Junior Isa

If you don't want to take too much risk with your money, the top paying cash Junior Isas are from Halifax at 4 per cent if an adult Isa is also held, or Nationwide Building Society and Coventry Building Society at 3.25 per cent and Mansfield Building Society at 3.05 per cent.

All these accounts can be opened with as little as £1.

Stocks and shares Junior Isa

These work like a normal stocks and shares Isa but can be more risky than cash and you will need to pay annual management and platform charges.

You will be able to put up to £4,080 into the Isa each year but it can only be accessed by the child at age 18 so you will need to monitor its performance to make sure you are securing a good return.

A number of providers offer DIY Junior Isa platforms including Hargreaves Lansdown, AJ Bell YouInvest,  BestInvest, Alliance Trust Savings, Charles Stanley Direct, Fidelity and The Share Centre.

Others offer more restrictive investments that are typically also more expensive, where you have much less of the choice about where you invest and less opportunity to move if you do not like the fund's performance, these include Scottish Friendly, Family Investments and Shepherds Friendly. These options invest in a mix of different assets - shares, bonds, property or cash - so take decisions about which assets to invest in off your hands.

This is Money prefers the option of opening a DIY investing Junior Isa, most will offer you help in choosing where to invest and some simple options.

There is a big fund, investment trust and shares universe that you can put into your DIY stocks and shares Junior Isa. Remember that you are investing for your child rather than yourself so your investment style and horizon may be different.

When considering a platform for your Junior Isa you need to consider the same things as when picking an adult one. Think about both service and charges. Compare a couple of providers on administration fees, investment funds charges, fund and share dealing costs, regular investing charges and any other fees. 

If you plan to regularly invest for your child make sure the cost of doing this is as low as possible, there are two main ways of doing this either discounted regular monthly investment, which platforms often charge £1.50 for, or using a platform that offers free fund dealing.

Read our guide to the top DIY investing platforms and what they charge.

Do you really want a Junior Isa?

Before deciding to save into a Junior Isa or put money into CTF, parents should consider carefully the restrictions.

Money put in cannot be taken out until the child is 18 and when they reach that milestone age, their pot is passed to them. Ultimately, beyond bringing parental influence to bear on them, you will not be able to stop them doing what they like with the money when they hit 18.

One alternative to a Junior Isa is to simply save into a standard child's savings account or invest using a standard DIY investing platform account, or even a children's specific investment plan. This carries tax implications, however, as explained above.

Some financial advisers suggest that if you are not using all of your own annual Isa allowance, then you could set aside some of this to invest for your children, holding some funds or a pot earmarked for them within your own DIY investing account.

For many there will be plenty of spare capacity for this, but for those who use a lot of their Isa allowance, plan on investing a sizeable sum for their children, or have a number of kids, this may be restrictive. A couple with two children could both have DIY investing Isas and use one of each per child.

WHERE HAVE INVESTORS PUT THEIR JISA MONEY SINCE NOVEMBER 2011?
1.       Marlborough Special Situations
2.       Marlborough UK Micro Cap
3.       M&G Global Emerging Markets
4.       Rathbone Global Opps
5.       Liontrust Special Situations
6.       M&G Global Dividend
7.       Newton Asian Income
8.       Newton Global Higher Income
9.       Artemis Income
10.   Woodford Equity Income
Source: Chelsea Financial Services platform data since November 2011

Child trust funds

Under the child trust fund scheme all babies born on or after 1 September, 2002 received a minimum £250 at birth and will get a similar lump sum when they reach the age of seven.

Parents along with friends and relatives can top up to £4,080 in the tax-free fund each year. No withdrawals can be made from the account until the child reaches 18 - at this point he or she is free to spend the money as they wish. You could open an account as soon as you receive your voucher

The child trust fund scheme was replaced in 2011 by Junior Isas. Parents could keep on putting money into the child trust funds but there would be no more government support and no transfers were initially allowed into Junior Isas.

As a result of this closure fund houses have concentrated their business on junior Isas meaning the choice of investments in and providers of CTFs has shrunk.

We have successfully campaigned for the government to allow transfers from CTFs to Junior Isas, and following a consultation on the issue, you are now able to move from your CTF to a Jisa.

HOW TO INVEST YOUR CHILD TRUST FUND

The best rate on a cash-based child trust fund is 3 per cent from Yorkshire Building Society.

There are still existing stocks and shares options of CTFs but there is less choice since Junior Isas took over as firms have concentrated on providing for the new scheme.

The Share Centre offers a Child Investment Account CTF, which charges a 0.5 per cent admin fee per year (minimum £10). Buying and selling funds or shares costs 1 per cent commission (£7.50 minimum), while regular investing carries a 0.5 per cent commission (minimum £1).

This CTF wrapper gives you the freedom to invest in shares and direct corporate bonds, funds, investment trusts and ETFs, all of which except shares and bonds will carry their own level of charges too.



TRANSFERRING FROM A CTF TO A JISA

The Treasury says transfers will operate in the same way as moving from one Isa provider to another.

You will need to choose a Jisa provider to move to and it should take up to 15 working days to transfer to a cash accounts and 30 days for non-cash accounts.

You will have to transfer the full amount from your CTF before then closing it. The provider cannot refuse.

However, the Junior Isa provider can decline the funds.

There is a risk that CTF providers will no longer have an incentive to give a good service for existing holders once transfers are allowed. However, you will still be entitled to complain if you feel your account is being badly managed, and the City regulator, the Financial Conduct Authority, has a responsibility to ensure there is fair competition in the market.

The Treasury has also said the government will seek powers to intervene if it appears the CTF market is no longer looking viable.

Five steps to move your Child Trust Fund 

1. Check the value of the Child Trust Fund and whether there will be any loss of guarantees or excessive charges upon transfer

2. Choose the Junior Isa provider to move to

3. Complete the Junior Isa provider’s application/ CTF transfer form and return to the Junior Isa provider

4. The Junior Isa provider opens the account and submits the transfer application to the CTF provider

5. After the transfer of the savings from the CTF to the Junior Isa, the Child Trust Fund is closed

The Junior Isa provider does the anti-money laundering checks electronically and may ask for further proof after the application. 

Transfers should not take more than 30 days. In most cases CTF savings will be transferred as cash. 

Children's savings and investment - and the bizarre tax treatment

Investment companies, banks and building societies also offer children's savings plans.

These products use a child's personal tax allowance as an amount they can earn a year before being taxed.

Parents need to fill out an R85 form - available at every bank - for each children's account opened so that tax isn't paid on savings. If tax is mistakenly paid, use an R40 form to claim back.

Parents and step-parents can gift their children as much money as they like, but there is a rule that the money can only earn up to £100 in interest a year tax-free. If it generates income above this, then tax will be charged at the parent who gifted the money's tax rate.

Money given by grandparents and other adults is not subject to this cap. 

For a longer term investment, you could put money into a children's investment plan.

Aberdeen offers the choice of 16 investment trusts and you can put in a lump sum minimum of £150 per trust or £30 a month per trust.

Baillie Gifford provides a range of eight investment trusts. You can invest a lump sum from £100 or make monthly contributions from £25.

Both have annual management charges and you will need to pay stamp duty on share purchases.

WHAT SHOULD YOU INVEST IN FOR KIDS?

Investing for children is a long-term game, so you can afford to take more risks than you might do with your own money, however, you should still make sure that you don't put all their eggs in one basket.

Unless you are a dedicated DIY investor then picking individual shares may not be the best move, a fund or investment trust will allow you to spread your risk and require less work.

A growth investment will aim to buy companies that will see their share price rise over time and mainly deliver returns, while an income investment will target companies that pay dividends - reinvest these and the effect of compounding over time can deliver solid results.

The other thing to consider is charges. High management fees eat into returns and over 18 years this can deliver a sizeable drag on how much an investment makes for your child.

Some therefore suggest that you target passive tracker funds, which carry low management charges, for example Fidelity Index UK invests in the FTSE All Share Index and carries charges of just 0.09 per cent, while the Vanguard FTSE UK Equity Index fund charges just 0.08 per cent.

On the other hand, others subscribe to the view that actively managed funds will deliver the best returns thanks to fund managers who pick shares for you - bear in mind that you will need to pick a good fund manager not just an average one though.

A middle ground can be found in some of the cheapest investment trusts. Managers here pick shares but offer investments with low fees. For example, dividend stalwart City of London charges 0.44 per cent, global growth high performer Scottish Mortgage charges 0.5 per cent, and bargain hunter Temple Bar charges 0.49 per cent. All have delivered market and sector-beating performance over five years.

If you do want an actively managed fund, then many DIY investing platforms pick the ones they believe stand out from the crowd and publish them in some form of selected list.

Here are some top picks for a range of investment styles from Jason Hollands, managing director of Bestinvest.

These funds could be put into a Junior Isa or just be used as long term investments.

Follow the links to find out more about the funds and see if they are suitable for you.

If you require financial advice, find a financial adviser near you.

Long-term, developed market equities

Aberdeen World Equity

Ongoing charge: 1.14 per cent

Yield: 1.5 per cent

This fund invests in stocks around the world with its top assets in the US, UK and Switzerland. Well known stocks include Vodafone, British American Tobacco and Shell.

Long-term, emerging market equities

Lazard Emerging Markets

Ongoing charge:  0.92 per cent

Yield: 2 per cent

This fund identifies companies based or doing significant business in, emerging market countries. Its main focus is on Latin America, the Pacific Basin and Europe.

Its biggest holdings include Banco de Brasil and Samsung.

Medium-term, UK growth, with sizeable exposure to small and mid caps

BlackRock UK Special Situations

Ongoing charge: 0.92 per cent

Yield: 1.9 per cent

This fund invests in companies listed in the UK and will normally have an emphasis on small or medium sized companies.

Medium term, multi-asset

Artemis Strategic Assets

Fund manager William Littlewood invests in a range of assets with the intention to perform well when markets are favourable, and preserve capital when markets are poor. Top holdings include BP, Shell and Samsung.

Ongoing charge: 0.84 per cent

Yield: 0.4 per cent

Low volatility

Standard Life Global Absolute Return Strategies

Ongoing charge: 0.89  per cent

Yield: 1.2 per cent

A 22-strong investment team looks to exploit market inefficiencies with active management in equities and bonds.

The fund uses derivatives to take long and short positions in particular markets.


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