Easter Monday isn’t just “pensions freedom day” - it’s also when many of Britain’s youngest savers will be freed from the shackles of their under-performing investments. From 6 April the parents of the six million-plus youngsters with money in a child trust fund (CTF) will have the opportunity to enjoy better returns, pay lower charges and have a much greater choice of products.
That’s because from that date parents will finally be allowed to transfer money held in a CTF into a Junior Isa. This is a change campaigners have been calling for pretty much ever since CTFs were scrapped by the government four years ago and replaced by Junior Isas.
For parents whose children’s accounts are paying as low as 1% interest it’s a chance to switch to alternatives offering as much as 4%, or to take a punt on the stock market.
But if you do nothing you’ll gain nothing – you have to proactively take action. So if your child has a CTF dig out the paperwork and give some serious thought to switching.
Here, we run through what’s changing and offer some suggestions for where you might want to move the money to.
If a child was born between 1 September 2002 and 2 January 2011, they are a “child trust fund baby”. Under the scheme, every baby born after 31 August 2002 received at least £250 in the form of a voucher from the government.
Some parents put the money into a cash CTF account offered by a bank or building society. However, the most popular type of account was the “stakeholder” CTF, where the child’s money is predominantly invested in shares. Of the 6.3m child trust funds in existence, almost 5m are stakeholders. Financial data website Moneyfacts.co.uk looked at how much some of the stakeholder funds are now worth, based on a £250 investment in April 2005, and found that one of the best performers has been the FTSE All Share Tracker fund offered by F&C Investments, which has turned £250 into £521. By contrast, the Lloyds TSB Baby Bond managed only £424.
There are arguably problems with both these types of child trust fund. There are only a handful of cash CTFs still up and running, and Sylvia Waycot at Moneyfacts says:“Today, the rates offered on cash CTFs are poor compared with Junior Isas.”
She points out that a child can earn as little as 1.1% from Nationwide’s cash CTF, yet if their brother or sister has some money in Nationwide’s Smart Junior Isa, they are earning 3.25%.
Junior Isas were launched in late 2011, and there are two types: cash, and stocks and shares. Official figures show that by August 2014 more than 430,000 Junior Isas had been taken out. The majority of parents have plumped for cash accounts, despite the fact that most financial experts insist that with a long-term investment of this type, shares are definitely the best place to be. Any UK child under 18 can have a Junior Isa, though the rule has always been that you can’t open one if you already have a CTF.
If you are thinking about switching your child’s money from a cash CTF to a cash Junior Isa, other decent-ish payers aside from the Nationwide include the Halifax’s Junior Cash Isa, which pays 4%, provided the parent or guardian holds one of the bank’s adult cash Isas (if they don’t, the rate is 3%). Meanwhile, Coventry building society’s Junior Cash Isa pays 3.25%.
So what about the millions of people with stakeholder CTFs? A key feature of these accounts was the requirement that their charges would be capped at 1.5% a year. This charging cap will undoubtedly have left some parents under the impression that they are getting good value for money – but the problem is that most stakeholder CTFs are invested in UK index tracker funds, and 1.5% is a very high fee for that sort of investment, says Jason Hollands at investment firm Tilney Bestinvest.
For example, the Fidelity Index UK fund, which tracks the FTSE All Share index, has a total ongoing charge of no more than 0.09%. “When combined with our Junior Isa account fee of 0.4% per annum, that means total costs of 0.49%,” adds Hollands.
Where CTFs also fall down is on the lack of investment choice. With Junior Isas you potentially have access to thousands of funds, trusts etc.
So which funds do the experts recommend for your child’s Junior Isa? Hollands says parents can select combinations of funds that give exposure to various parts of the world, or choose investments that take a global approach, such as the Scottish Mortgage Investment Trust, managed by Edinburgh-based Baillie Gifford. Scottish Mortgage’s share price is up an impressive 97% over three years but, says Holland, investors should be aware the trust is “geared” and can be very volatile.
Another fund he likes is Artemis Strategic Assets, which invests across a wide range of markets and asset classes.
Danny Cox at investment firm Hargreaves Lansdown says Junior Isa investors looking for a potentially better return than they would get from a cash account but without the full volatility of stock markets should consider the Newton Real Return fund. “This is a long-running fund with an excellent track record of protecting investors while generating decent returns,” says Cox.
Meanwhile, those willing to accept some volatility might want to consider the Lindsell Train Global Equity fund, he adds. This is a concentrated portfolio of around 30 companies, including (according to the latest fund factsheet) names such as Heineken, Nintendo and eBay. Those who simply want to put money in the market without choosing a fund manager may want to have a look at the “ultra low-cost” Legal and General UK Index fund, which again tracks the FTSE All Share and where the ongoing charge is as low as 0.06%. Cox says more adventurous investors could look toward emerging markets, where the First State Asia Pacific Leaders fund is a firm favourite because of its conservative approach in a risky area of the investment world.
