CTFs and Junior ISAs explained

CTFs and Junior ISAs explained

CTFs and Junior ISAs explainedChild Trust Funds (CTFs) have now been closed to new savers and replaced by Junior Individual Savings Accounts (ISAs).

Here, we look at the differences between the two savings schemes and explain how to make the most of them.

What is a CTF?

The Labour government announced the launch of CTFs in 2003.

The idea was to encourage parents to save for their children by providing tax-free returns and offering to kick start the fund with a government contribution of at least £250 for every child born after 1 September 2002.

The scheme has now been scrapped. But children with CTFs are not eligible for Junior ISAs, the tax-efficient accounts introduced as a CTF replacement by the current government.

The amount that parents and other relatives can pay into CTFs was therefore increased to £3,600 – in line with Junior ISAs – on 1 November 2011.

What is a Junior ISA?

As with adult ISAs, a Junior ISA comes with generous tax breaks.

Consequently, there is no income tax on saving returns and no capital gains tax or tax on dividend income for those who choose the investment version.

And, as with CTFs, the accounts are designed to provide a lump sum when the child reaches 18 years of age – although there is no government contribution to the fund.

If your child qualifies for a Junior ISA, you can choose between a cash account, a stocks and shares version offering access to investments such as investment funds, gilts and bonds – or a combination of the two.

You could, for example, choose to put £1,000 of the annual allowance – £3,600 for this tax year – into a cash-based savings account and the other £2,600 into an investment fund.

My child has a CTF. How can I ensure he/she gets the best returns?

Like Junior ISAs, CTFs come in both cash and investment forms.

And given the relatively long time horizon for the investment, most savings experts agree that an investment CTF from a manager such as F&C Investments is likely to produce better returns overall.

You can switch providers if you are not happy with performance.

However, whether you choose a cash or an investment CTF, the bad news is that the number of providers offering CTFs has already fallen by about 10% since they were closed to new savers.

Cash Junior ISA rates from providers such as Nationwide are often much better than those offered on cash CTFs as a result.

My child qualifies for a Junior ISA. How can I ensure he/she gets the best returns?

A well-run investment Junior ISA should produce higher returns than even the best cash account over 18 years, with someone investing the maximum each year potentially ending up with more than £100,000.

For smaller savers, meanwhile, Family Investments is offering a Junior ISA with access to stock market-based investments and a minimum premium of just £10 a month.

If, however, you would prefer the security of cash for your child’s nest egg, cash Junior ISA providers include Halifax and Nationwide.

No matter what you are saving for or how much you can afford to put aside, why not take a look at our guide to the best cash ISAs.

Disclaimer: Where we compare financial products offered by different financial services providers or make a recommendation in relation to a particular product or provider, we do so as the providers of an information service, and this is not intended to constitute a recommendation, invitation or inducement to any particular individual to make any specific investment.