Maturing CTFs – a sector that could benefit from advice?

Inter-generational planning is about passing on wealth in the most effective way, so there is clearly potential for Advisers, as experts in the field, to play a key role. In this article we are going to investigate the fast-growing savings and investments market for children and grandchildren to assess the ongoing opportunity for Advisers to provide their services.

Why is this relevant now?

Well, in September 2020, a wave of Child Trust Funds (CTFs) began to mature:

  • Starting from September these windfalls will run all the way through until January 2029, with about 55,000 teenagers each month becoming entitled to a pot of cash
  • More than 6.3m CTF accounts were opened holding an estimated £9bn
  • The combined estimated maturity value this year is £2.4bn, according to analysis by CTF provider The Children’s Mutual (now Foresters Financial)

If parents had saved consistently over the years, some soon-to-be-18-year-olds could be sitting on a windfall of £33,564! (Based on someone who got the two £250 government contributions and whose parents have added £100 a month since birth and invested it in the FTSE 100).

These maturing investments are in addition to all the funds sitting in Junior ISA accounts (JISAs).   This sector has seen growth year on year since launch in 2011 with a total of £974 million subscribed to JISAs in 2018-19.

Additionally, a rule change in 2015 allowed for a tax efficient transfer from a CTF - with its potentially more limited investment choice - to a more open architecture JISA.

HMRC data from 2019 shows that of the £4.8 billion contributed to JISAs, more than 50% was in cash, which most financial commentators would suggest is a poor long-term home for wealth because of the corrosive effects of inflation. Following that line of thought, many would say that parents and grandparents could benefit from investment advice to help them get better outcomes for their children and grandchildren.

There is an opportunity for Advisers to help parents manage their children’s investment through a platform alongside their own investments, and for these Advisers to then develop secondary client relationships and build their next generation of family clients when these children become legally entitled to their savings at 18, helping them to navigate the investment world.

True, there are different views in the market about what 18-year-olds will decide to do with their savings when they officially take control of them at maturity. However, with HMRC amending the ISA regulations to allow savings transferred from a matured CTF to be discounted for the annual ISA subscription limit, the hope is that many will keep these pots for the future.

At Novia Financial we feel this market has now become an important one and so to support our Adviser firms we are launching a JISA in early 2021.

Increased contribution limits give greater scope for tax planning

In the last budget an increase of the Junior ISA contribution limit to £9,000 for 2020/21 was announced. Assuming compound growth of 5% and using the maximum allowance each year, new parents could now accrue more that £250,000 for their child by their 18th birthday…. again, a staggering amount from a pure tax planning perspective.

How does a JISA differ from a CTF?

It’s been possible to transfer a CTF into a Junior ISA since April 2015. In some cases, this might be desired because of an appetite for a less restrictive investment strategy, or it could be to make use improved functionality, such as 24-hour online access. Looking at the table below, it could certainly be argued that JISAs generally offer more flexibility, choice and investment options than the most common CTF structures.

 

Basic Stakeholder CTF

JISA

Tax efficiency

Free from capital gains tax and no UK tax to pay on income. No need to declare on tax return.

Free from capital gains tax and no UK tax to pay on income. No need to declare on tax return.

Investment Choice

Limited – money is often invested in index tracker funds, e.g. tracking the FTSE100.

A wide range of options:

  • Generally, over 2,000 funds choices
  • A range of DFMs
  • A cost-effective range of ETFs allowing cheaper cost to investments
  • Cash can also be held

Charges

Annual management charges on stakeholder CTFs are

capped at 1.5%. Many providers charge the full fee.

Can vary significantly, depending on the investments chosen. Lower cost options

are available.

Lifestyling

Lifestyling, with a shift to lower risk investments closer to maturity, is no longer mandatory when a child reaches 15, although

some providers will still offer it, and if lifestyling is implemented

and parents want to opt out, the onus is on them to inform the provider

Parents and advisers can choose how to invest to match their objectives and attitude to risk over the defined investment period.

At age 18

A decision will need to be made about what to do with the money. The child can decide to take the cash or transfer to an adult ISA. If no decision is made the CTF provider will put the money in a ‘default’ account – either a ‘matured CTF’ or an ISA, depending on what the provider decides to

do, until the child makes decision.

The Junior ISA remains invested and automatically

converts to an adult stocks and shares ISA.

Functionality

Many CTF providers only allow the account to be managed via the post or over the phone.

24/7 account access online and the parents can link a Junior ISA to their own account, making it easy to manage all the family investments in one place.

Summary

As with any advice point there will be considerations about the most suitable tax structure and investment strategy for the child and their parents, but with the new annual contribution limits and the wave of capital that’s accrued in JISAs and CTFs now maturing, this could be an opportune time for Advisers to engage with their clients to discuss this growing area of tax planning.

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Appendices:

A Brief history of CTFs

Child Trust funds were introduced in 2002 and £250 was paid by the Government into them for new-borns. Parents or guardians could top these up and they could be invested in cash deposits or stocks and shares.

There were three types of account that could be opened with the voucher:

  • Cash Child Trust Fund – where you can make deposits just as you would for a bank account, which can earn tax-free interest.
  • Stakeholder Child Trust Fund – where the savings in the account are put into a wide mix of stock market investments, with a set of rules to reduce financial risk (including that the money would gradually be moved to lower-risk investments when the child reaches 13 and a cap on the annual charge). Stakeholder Child Trust Funds are charged based on the value of the fund and capped at a maximum charge of 1.5% a year. A child will have a stakeholder Child Trust Fund account, opened by HMRC on the child’s behalf, if their parent(s) failed to open a Child Trust Fund account within a year of receiving a payment voucher.
  •  Shares-based Child Trust Fund – where most or all the money is invested in shares, but without the protections of a stakeholder account. The savings in the account could be put onto the stock market via an investment fund of your choice or into your own investments.

CTFs were replaced in 2011 by Junior ISAs (JISAs). Like adult ISAs they allow income and growth on the fund to be received tax free. At age 16 the child is made aware of the investment and able to manage it and can cash it in or transfer it into an adult ISA at age 18.

Children can have either a CTF or JISA and have been able to transfer a CTF to a JISA since 2015 but cannot simultaneously own both.

Parents and grandparents wishing to give grandchildren a good start may pay into a JISA but only a parent or guardian can establish one. The new limit could enable wealthy families to pass on a considerable amount of wealth.

However, care would need to be taken due to the annual gift allowance on an inheritance tax free basis. Anything over this limit would remain potentially chargeable to inheritance tax for 7 years.

But whilst parents and grandparents wishing to make larger gifts would need to take this into account, if they have surplus income advisers could explore making regular payments over more than one tax year, which are exempt from inheritance tax immediately, with no upper monetary limit.

How a Junior ISA works

A child’s parent or legal guardian must open the Junior ISA account on their behalf.

Money in the account belongs to the child, but they cannot withdraw it until they turn 18, apart from in exceptional circumstances. They can, however, start managing their account on their own from age 16.

The Junior ISA limit is £4,368 for the tax year 2019-20 (£9,000 2020-21).

No tax is payable on interest or investment gains.

When your child turns 18, their account is automatically rolled over into an adult ISA.

Your child can have a Junior Cash ISA, a Junior Stocks and Shares ISA or both, but if they have both, the most they can save is still subject the £9,000 limits in 2020-21.

You can switch between the two types of Junior ISA or from one provider to another whenever you like.

A child can only have one Junior Cash ISA and one Junior Investment ISA at any one time.

Sources:

HMRC ISA Stats June 2020 -https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/894771/ISA_Statistics_Release_June_2020.pdf

https://www.businessfast.co.uk/maturing-child-trust-funds-set-to-hand-18-year-olds-up-to-70000/

https://www.theguardian.com/money/2020/aug/22/9bn-bonanza-begins-as-child-trust-funds-come-of-age

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