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Check charges before you transfer a CTF

Junior Isas are often a better option than child trust funds, but check the costs involved before you switch

On 1 November it will be four years since the introduction of junior individual savings accounts (Jisas), which have been available since 2011 to children under the age of 18 who do not have a child trust fund (CTF). Parents of children born between 1 September 2002 and 3 January 2011 could save tax efficiently into a CTF.

In the current financial year you can invest up to £4,080 into a Jisa, and as with adult Isas you won't pay tax on any capital growth or dividends you receive. Junior Isas are in many ways a better option than their forerunner and since 6 April this year it has been possible to transfer a CTF to a Jisa.

Cash Jisas can offer better interest rates than CTFs, and there tends to be a much wider range of investment choices with stocks-and-shares Jisas than their CTF equivalents. Costs on Jisas also tend to be lower than on CTFs. About three-quarters of CTFs are stakeholder accounts, according to Jisa provider Orbis Access, and these are allowed to charge up to 1.5 per cent. As these are often invested in low-cost tracker funds this level of charge is high - you can invest in passive tracker funds for charges of less than 0.1 per cent.

Orbis Access calculates that a Jisa tracker on a typical platform will cost approximately 0.76 per cent, based on a 0.35 per cent platform fee plus 0.41 per cent for the tracker fund management fee. A Jisa holding active funds on a typical platform will on average charge around 1.33 per cent, made up of a 0.75 per cent annual management charge, 0.35 per cent platform fee and additional expenses of 0.23 per cent.

Meanwhile, Holly Mackay, founder of information website Boring Money, says: "If people are investing in funds, the newer Junior Isa options typically offer a better online service, more choice and a slightly lower fee of circa 1.1-1.2 per cent all in for an actively managed portfolio of funds."

Below are the charges for some of the consumer platforms that offer junior Isas. If you invest in funds, you need to add the annual management charges to the equation. "These typically range from about 0.6 per cent to 0.75 per cent for active funds, although passives will be a lot cheaper," says Ms Mackay.

 

Platform Annual admin fee for funds Annual admin fee for shares, investment trusts, ETPs and bondsFund trade chargeShare trade chargeTransfers out Other information
AJ Bell Youinvest0.2% (capped at £50 a quarter) No charge4.95£9.95£25 per holding-
Alliance Trust Savings£10 a quarter£10 a quarter£12.5£12.50£100+ VAT-
Bestinvest0.4% up to £250,0000.4% up to £250,0000£7.50£25 per line of stockIf transferring, covers account closure fee/ exit costs up to £500 per investor
Charles Stanley Direct0.25% on first £500,0000.25% (maximum £150)None£10£10 per holdingIf you place 6 or more chargeable trades in each six-monthly charging period no charge to hold shares
Fidelity Personal Investing0.35% up to £250,000£5.10 per monthNA£9 for shares, 0.1% for ETFsNone-
Hargreaves Lansdown0.45% on first £250,0000.45% capped at £45 across all holdingsNone£5.95£25 per holding and £25 as cash-
Interactive Investor£20 a quarter (includes 2 free trades)£20 a quarter (includes 2 free trades)£10£10£15 per holding waived in first year-
The Share Centre DIY Junior Isa£1+VAT a month£1+VAT a month1% a deal (minimum £7.50 per trade)1% a deal (minimum £7.50 per trade)£25Will pay up to £300 towards transfer costs as long as you transfer at least £1000 of investments
Trustnet Direct0.25% capped at £200 a year0.25% capped at £200 a year£10£10£15 a holding-
Willis Owen0.4% per cent up to £50,0000.4% up to £50,0000£7.50£25 per line of stock-

Source: Boring Money, Platform, providers' websites.

 

You can have both a cash and a stocks-and-shares Jisa for each child, whereas you could only have one type of CTF holding cash, or stocks and shares.

"No new CTF products are being taken out so these accounts are being run down, and you may prefer to be in a product that is developing and growing, rather than what is effectively a zombie fund," adds Danny Cox, chartered financial planner at Hargreaves Lansdown.

 

Transferring from a CTF to a junior Isa

Typically there is no charge to transfer out of a cash or stakeholder CTF, but you may incur one for those that hold stocks and shares. Killik & Co, for example, does not charge to transfer from a CTF into a Killik junior Isa; however, it does charge £25 per line of stock to transfer an account away from Killik.

The CTF provider may also charge some form of transfer fee, such as an administrative fee.

"If the CTF is held in some form of fixed notice account, a penalty might apply for early closure, so CTF holders should always check such terms beforehand," adds Dan Brocklebank, director at Orbis Access.

If your child is almost 18 and the account does not have long to run it is probably not worth switching to a Jisa.

If you do switch, make sure the Jisa is cost-efficient and matches your chosen risk level. "Most junior Isas, unless investing in multi-manager funds, will have charges below 1.5 per cent," says Patrick Connolly, certified financial planner at Chase de Vere. "But be wary of high charges: junior Isas investing in funds of funds on a platform are effectively paying three levels of charges: the fund of funds manager, the underlying fund managers and the platform charges."

While about 80 per cent of CTF holdings are in stakeholder accounts, there isn't an equivalent stakeholder Jisa. Stakeholder CTFs hold a spread of investments that typically include equities and fixed interest, and have a lifestyling feature that moves more money into less risky assets such as government bonds as the child approaches 18. If you do not have the time to manage your children's Jisa, or do not wish to do this for other reasons, a CTF stakeholder account could be useful.

But Mr Connolly says: "A lifestyle approach is only effective if the child is likely to take money out of their investment at 18, and in many cases that won't be the case and it will remain invested."

Hargreaves Lansdown says that, so far, 97 per cent of its Jisa investors keep their adult Isa when they turn 18, extending the investment period further.

Your child cannot have a CTF and junior Isa at the same time. However, you can simultaneously open a Junior Isa and instruct the transfer of a CTF.

 

How to transfer a CTF to Junior Isa

■ Check the value of your child's CTF and whether there will be any loss of guarantees or excessive charges upon transfer.

■ Choose the junior Isa provider, and whether you are going for a cash or stocks-and-shares account.

■ Complete the junior Isa provider's application/CTF transfer form. You will need to include the following details:

Name, address and date of birth of the child, and if aged 16 years or over, his or her national insurance Number.

Your (the parent's/guardian's) personal details, including contact details and date of birth.

Investment instructions - whether you want to invest in shares, funds, investment trusts and exchange-traded funds (ETFs), or cash.

The transfer application part of the form with the details of the CTF including the unique reference number.

If you're the main contact for the CTF account you're called the registered contact, and have certain responsibilities until the child is 16 and can manage their own account. "The registered contact for the CTF must complete the junior Isa application/CTF transfer form," says Danny Cox, chartered financial planner at Hargreaves Lansdown. "The junior Isa provider opens the account and submits the transfer application to the CTF provider. After the transfer of the savings from the CTF to the junior Isa, the CTF is closed."

The junior Isa provider will also make anti-money-laundering checks electronically and may ask for further proof after the application. Transfers should not take more than 30 days, and in most cases CTF savings will be transferred as cash.

 

Risks

When a child reaches 18 they can access the money held in a Jisa or CTF so there is a risk they will not spend it as you intended. "This could mean that money put aside to pay for university fees or mortgage deposits could potentially be squandered on foreign holidays and fast cars," says Mr Connolly.

It might be better to fully fund your own Isa and pension first, and if you have exhausted those allowances then invest in a junior Isa. You could use money from your Isa or pension to fund your children's university fees, mortgage deposits or whatever else you intended the money for.

However, Mr Cox says: "We have also seen that when young people are given a capital sum at age 18, it doesn't just become a beer fund. Almost all of them hold on to their investment for at least a year and 46 per cent invest further into their account."

 

Choosing a junior Isa

You can open a cash as well as a stocks-and-shares junior Isa account, however, government statistics show that 72 per cent of all junior Isa accounts are held in cash.

An investment into a stocks-and-shares Jisa is likely to provide a better long-term return. Although there will be more ups and downs along the way, most advisers suggest that you opt for this. Mr Connolly says that while junior cash Isas are a logical option, as all interest is tax-free, it is often possible to achieve better interest rates with other bank and building society accounts and, as children are able to use their own personal income tax allowance, most children's savings will be tax-free anyway.

If you hold the money in a regular savings account you will also have instant access.

But there are some exceptions. "For those saving for the short term - five years or less - then it isn't sensible to invest in stocks-and-shares junior Isas," says Mr Connolly. "In this situation there wouldn't be time to make up any investment losses. Instead, you should look at options where you know that the money will still be there when you need it."

Because the amounts going into a junior Isa are likely to be relatively modest, Mr Cox says an account with a charge based on a percentage of the assets under management is maybe better than flat fees.

When choosing a provider he suggests you look at what investment choice they offer if you are self-investing a stocks-and-shares junior Isa, and what their level of service is.

Orbis Access says that you should also check the minimum lump sum requirement to make sure it is something that you can afford and makes financial sense. In many cases, it is £500, and if there is a requirement for a regular saving plan, this often starts from £10 per month, although some providers do not require this.

If you are self-managing many accounts, platforms that allow you to manage multiple accounts are a good option. Having the various accounts in one place can make it easier to manage them and apply a consistent investment strategy.