If you’re saving for your child’s future, you probably want to make the most of the money you’re putting away. That’s why you might consider putting the money in a tax-free account just like an adult ISA, so that income tax isn’t charged on the savings interest.
Since April 2015, Junior ISAs (JISAs) have been available for this very purpose and you can save into one on your child’s behalf. However, if you saved for your child before this date you might have opened a Child Trust Fund (CTF), a now defunct tax-free savings product. You can transfer any CTFs you may have into a JISA, but is it a good idea to do this?
Switch or stay?
Generally speaking, cash JISAs are better than cash CTFs so if you’ve got your child’s money saved in the older product, it’s usually a good idea to switch. This is because the top cash JISAs have better interest rates so you’ll probably be getting a better return on what you’re saving.
However, one reason why you might want to think twice about switching is if your CTF charges you high fees to withdraw money out of it or close it. Accounts from different providers have varying levels of fees so it’s a good idea to check the details of your CTF to find out whether it’s worth switching out of it for sure.
The decision whether to switch might also be a bit trickier if you were previously saving in an investment CTF and you’re looking to switch to an investment JISA. What you ultimately decide will depend on how your investment portfolio in your current CTF is performing and what’s available in investment JISAs, so it’s worth speaking to a financial adviser about this.
How to transfer
If you do decide to switch your child’s CTF to a JISA, you’ll first need to find the best performing account for you. Some JISAs offer over 3% AER so have a look at what’s available from some of the account providers – some will let you make transfers, others will offer a better rate if you already hold an adult ISA with them as well.
When you’ve opened the JISA, you’ll need to complete a ‘Junior ISA transfer form’ – this will be available from your account provider. You’ll have to detail information about your CTF and submit this to your new JISA provider – it will then carry out the switch for you. This should be completed within 30 days, and your old CTF will then be closed.
Saving for your child
No matter whether you’re saving into a JISA or a CTF, the amount you’ll be able to save in one year is the same – £4,080. In a CTF, a year runs from your child’s birthday to their next birthday whereas with a JISA, it follows the tax year from 6 April. Both will lock their money away until your child’s 18th birthday so you can really start to build up a nest egg for their adulthood.
If you want to save more than £4,080 in a year, you’ll have to save this in another savings account. Whenever you open a savings account in your child’s name, you’ll have to fill out an R85 form to ensure they don’t have to pay tax on their savings interest. You’ll be able to pay as much money as you like into this, but your child can only earn up to £100 in interest tax-free in a year. If you save more than this, tax will be charged at your income tax rate.
However, this limit only applies to money given by a parent or step-parent so if your child has very generous grandparents or other relatives, they’ll still be able to save this money without paying tax on the interest.