Guest post by Jason Hollands, MD of Tilney Bestinvest
New Rules for Child Trust Funds could cut investment costs for almost 5 million children – but only if you know what to do!
From April 2015, Child Trust Funds can be transferred to much more competitive Junior ISAs - but most parents are unaware. Up to five million children born between 1 September 2002 and 3 January 2011 could potentially benefit from new flexibility to transfer Child Trust Funds (CTFs) into Junior ISAs being introduced from the 6 April. However, most parents and guardians are likely to be oblivious to this due a to a policy fudge. Instead of implementing a policy that would merge CTFs into Junior ISAs, from 6th April the government will allow parents to voluntarily transfer CTFs into Junior ISAs. This will require parents ‘in the know’ to request the necessary paperwork. As a result, lack of awareness and inertia could see millions of children endure lower returns as a result.
A Bit of Background
Initially launched with great fanfare by Gordon Brown during his tenure as Chancellor and accompanied by the distribution of £250 vouchers from the State to all new born children, the Coalition put an end new CTF accounts being opened - replacing it instead with an entirely voluntary scheme, the Junior ISA.
CTFs have become a “zombie” product, with lack of competition and innovation between providers. According to data from HM Revenue & Customs, some 4.84 million CTF accounts representing almost 80% of all CTFs, are invested in Stakeholder Accounts. 1.75 million of these were opened by HMRC after parents had taken no action within 12-months ofreceiving this “free money” for their offspring.
Problem 1: The Charges and Fees
Stakeholder CTF accounts have effectively been the default option and a key feature of these accounts is a requirement that their charges would be capped at 1.5% per annum. The charging cap will undoubtedly have left some parents with the impression that this must represent value for money. Indeed many providers describe the benefits of their Stakeholder CTFs as being “low cost”. Yet most Stakeholder CTFs are invested in UK index-tracker funds and 1.5% is actually a very high level of fee for such investment strategies. To illustrate this, our Online Investment Service provides access to the Fidelity Index UK W fund, which tracks the UK stock market as defined by the FTSE All Share Index, for on-going charges of just 0.09%. When combined with our Junior ISA account fee of 0.4% per annum, that means total costs of 0.49%, over two-thirds lower than most Stakeholder CTF accounts which are invested in similar, index-tracking funds. As these children’s savings schemes are typically very long-term investments, which are only accessible from aged-18 that could make a surprisingly big difference in outcomes over time for what are, fundamentally, very similar investments.
Problem 2: Lack of Investment Choice
Costs aside, the fundamental weakness of the CTF market is principally the lack of investment choice available compared to the Junior ISA market. Our Junior ISA alone offers access to over 2,500 funds as well as investment trusts, Exchange Traded Funds and other UK listed shares. By focusing a child’s investments exclusively on UK-listed investments, you could be forgoing a lot of opportunities. Junior ISAs enable parents to access some of these either by selecting combinations of funds that give exposure to other regions of the world or choosing investments that take a global investment approach such as the Scottish Mortgage Investment Trust, which invests in high growth companies from China to the USA and has very low costs, or the Artemis Strategic Assets fund which invests across a wide range of markets and asset classes.
So What Should You Do? Jason’s Advice:
As a parent with two young children, I’m all too well aware that there are a lot of costs that accompany bringing up a family and for many, these come at a time in their lives when parents are trying to pay off a mortgage, so it is often the case that savings and investments are made by grandparents as well as parents. I think some of the key points for parents or grandparents are:
- Consider your timescale and don’t be too risk averse: focus on shares. Investments in Junior ISAs and Child Trust Funds can only be accessed once the child is aged 18, so these are very long term investments and one of the golden rules of investing is that there is a relationship between risk and reward. While many parents have chosen to invest their children’s Junior ISA in cash, perhaps in the belief it is “safe”, that’s actually a dreadful place to invest for the long-term, not just because interest rates have been at an all-time for nearly five years, but because the capital doesn’t grow. And that means that over time, the real value of cash is slowly eaten away by inflation. For long term investments of over five years, parents should be prepared to invest in stock markets. While share prices can be volatile from day to day, over nearly all long-term time horizons they have delivered much higher returns than cash and over time, the short term ups and downs are smoothed out.
- Choose funds to reduce risk. Of course many if not most parents won’t feel comfortable trying to pick shares and should instead look at funds which invest in the stock market where the cash invested is pooled together with lots of other investors and then invested on your behalf in a wide selection of companies. An investment fund might hold between 50 and 600 investments, far more than you could invest in directly within a Junior ISA. There are many funds to choose from and the differences in results can be significant, depending on the skills of the fund manager making the decisions, so it is important to choose carefully. Alternatively, you can invest in a computer-driven fund called an “index tracker” designed to follow the overall movements in the stock market, rather than try and identify the investments a fund manager believes will do especially well. Index trackers won’t generate stellar returns, but their fees are low. Not only should a well-managed fund deliver a better return that most of us could achieve under our own steam, the diversification they bring also helps reduce risk.
- The world is your oyster. There’s a tendency for UK investors to choose funds that only invest in the UK stock market, but we are just one part of the globe so there’s a case for pursuing an international approach to get access to faster growing parts of the world such as Asia as well as major economies such as the US.
- Consider saving regularly. Investing a small amount on a monthly direct debit, is a great discipline if you can afford to do so and it also helps iron out some of the ups and downs in the markets. Some months you will invest when markets are on a high, others you will buy when they have dipped and together you should end up with a smoother return. There’s nothing more annoying than to invest in one big lump sum, only to see the markets fall a few days later.
- Keep an eye on your investments once invested. Even though a Junior ISA is a long-term investment, it is still important to check in every now and then and make sure the investment is performing well. With a Junior ISA, if your fund disappoints you can always switch to another one if the account offers a wide choice.
For more information, you can download the free guide to saving for children available from Tilney Bestinvest.
Jason Hollands is the Managing Director at Financial Planning firm Tilney Bestinvest - a leading investment and financial planning firm with a heritage of more than 150 years. They look after more than £9 billion on their clients’ behalf and pride themselves non offering the very highest levels of professional client service with transparent, competitive pricing. www.bestinvest.co.uk The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ. Toddle About Disclaimer: The content of this article does not constitute financial or other professional advice - Toddle About accepts no responsibility or liability as to its completeness or accuracy. You should consult your professional adviser if you require financial advice.