Child trust funds were a popular way for parent or guardians to start a savings account for their dependants, particularly with the government depositing up to £500 free for each new account opened. However frustrations were born due to poor investment rates and zero flexibility, which made child trust funds an expensive investment.
Thankfully, as of 6 April 2015 the rules have been relaxed meaning that you can now transfer over any existing child trust funds to a more flexible junior ISA.
What are child trust funds?
Originally introduced in April 2005, they were intended to encourage long-term saving to give the nation's next generation a financial boost when the reached 18. By way of incentive, the government would pledge between £250 - £500 to get your fund off to a nice start.
At the time there were three options:
Cash Child Trust Funds -There work in a similar way to a cash Isa, with the interest earned on savings being tax-free
Stakeholder Child Trust Fund – With these, your savings are put into shares on the stock market. Charges were capped at 1.5% a year, and shares were split of a range of investments to minimise the risk
Shares-based Child Trust Fund – This type of scheme allowed you to pick an existing investment fund to plough your money into shares – or alternatively to find your own investments
The Current State of Child Trust Funds
As mentioned above, Junior ISA's are the closest equivalent now, since child trust funds were discontinued in January 2011. At the time this happened interest rates had fallen, with the charges for investment being high compared to Junior ISA.
For around 4 years there was a limbo period with holders of child trust funds being stuck with their investment, however it is now possible to transfer across to a Junior Isa and get a better deal.
Reasons to switch to a Junior ISA
You may be disinclined to switch due to the paperwork, but there are a number of benefits
- Interest rates are higher (shop around for the best deal)
- There are plenty of providers, creating value through marketplace competition
- Many existing child trust funds don't allow new investments
- Stocks and shares are significantly cheaper with Junior ISA's. Annual fees sit between 0.5 – 1.0%, whereas it's 1.5% with trust funds
- There is a much wider choice of investments
How do I transfer an existing fund?
Before you take any steps to switch you should first find out the value of your existing child trust fund (particularly if it's shares-based), along with finding out if there are any exit fees or charges which might be applicable upon switching. With this information in hand you can then calculate, based on the rates of the Junior ISA you're looking to switch to, whether or not it'll work out as a better investment in the long-term. The chances are that it will, but it will depend on your own circumstance to an extent.
Once you've found a Junior ISA to switch to, the process is fairly straightforward:
Complete a Junior ISA transfer fund with the new provider, giving details of where the trust fund is currently held
If the Junior ISA to be opened is a stocks/shares based one, you'll need to advise the new provider as to where the money should be invested.
The new provider will then process the switch on your behalf
Within 30 days the switch should be completed and your child trust fund closed down. You should receive notification in writing as confirmation.