How do I transfer a Child Trust Fund to a Junior ISA?
"WHEN our child was born we opened a Child Trust Fund, but we'd like to move the money into a Junior ISA instead. How do we do that?"
Under the last Labour Government, almost every child born between September 1st 2002 and January 2nd 2011 was eligible for a Child Trust Fund (CTF).
The Government gave parents vouchers of between £50 and £250 if they wanted to set up a CTF, in which they could save a certain amount every year tax-free.
But the Conservative-Lib Dem Government scrapped CTFs, replacing them with Junior ISAs (JISAs) - and taking away the voucher to kick start any saving efforts.
That left some six million children with money locked in the equivalent of a zombifying savings market, with dwindling interest rates.
What's more, any children eligible for a CTF - regardless of whether they had one or not - weren't allowed to have a JISA.
But in April 2015 that all changed. Since then, parents of children with CTFs have been able to transfer the money saved - an estimated £5 billion in all - into a JISA.
This is our guide to how and why to do just that.
What's the difference?
Note before we go any further: no one with a CTF is under any obligation to move the money to a JISA; families can continue to save or invest in the account they've got for as long as they like.
Both CTFs and JISAs offer tax-free savings, both lock away the money invested until the child named on the account is 18, both offer the opportunity to save cash or invest in some form of stocks and shares.
We'd be forgiven for thinking they're the same thing with a different name.
But that could be doing our children a serious financial disservice.
All the CTFs that exist now are legacy products. Most providers don't allow completely new CTFs; instead it's likely holders will be expected to transfer an existing CTF into that provider's version.
As mentioned above, the CTF market is slowly zombifying; with a limited market, providers have little incentive to keep them competitive, a situation that hasn't improved since transfers to JISAs became possible.
The best cash CTF available at the time of this update offers interest of 3.0% for the first year, then drops to 2.3% after that; the next best offers 2.65% variable.
In addition, some providers have started charging fees on their investment CTFs, as we discussed when it was first announced that CTFs would become transferable.
When they first appeared, the top cash JISAs offered interest of around 6%. That's dropped to about 3.25% variable - not that much more than the best performing CTFs.
They tend to allow smaller deposits, however - from as little as £1, compared to at least £10 and usually around £50 for the better performing CTFs - making them a little more flexible.
That doesn't entirely make up for the loss of the Government-funded lump sum to kick start the CTF, which may explain why fewer lower-income families had heard of JISAs.
But that lower minimum deposit will make switching more worthwhile for those families who can't afford to save much at a time.
How do we switch then?
Moving from a CTF to a JISA should actually be pretty simple.
Because the money in the CTF is locked away, it can't be withdrawn - instead it'll need to be transferred into a JISA. Not all JISA providers accept transfers in, so do check before starting the account opening process.
But transferring has one huge advantage - the same advantage as adults thinking about moving to a better performing ISA would also do well to remember.
Transferring money from one tax-free account to another - be it an adult's ISA to ISA, or a CTF to a JISA - boosts the balance without counting towards that year's savings and investment allowance.
For example, for the tax year beginning 2016, CTF and JISA holders are allowed to save up to £4,080 a year in their JISA or CTF.
Transferring whatever's saved in the CTF straight into the JISA doesn't have any impact on that allowance: that means family members can deposit up to another £4,080 during the rest of the year.
As long as the provider accepts transfers in, it should simply be a case of telling them to open a JISA via transfer and asking for the required forms.
We then need to contact the old provider to let them know the account is being transferred.
Depending on the terms and conditions of both old and new providers, the money should be moved into the new account and the CTF closed within a month or so.
Things to note
As noted, transferring a CTF to a JISA will result in the CTF closing. As they're not available any more, that'll be it - there's no switching back to a CTF should we decide we've made a mistake.
Adults can open fresh cash and investment ISAs every year, and put money into as many or as few of them as they like, as long as they don't exceed the overall £15,240 allowance.
But children are only allowed one cash JISA and one investment JISA.
So say we find a cash JISA with a better interest rate than the one we've switched to: we can only open an account with that provider by a complete transfer from the existing JISA, resulting in its closure.
Likewise, if we think the shares JISA we've got isn't performing as well as it could be, or we've found one with lower fees, we can only take advantage of the better product by transferring the existing JISA to the new provider.
Note though that having one of each type - a cash and an investment JISA - is fine, as long as total contributions don't exceed £4,800 during the tax year.
When can we get hold of the money?
The idea behind both CTFs and JISAs is that the money is locked away until the child is older. That way, even if contributions tail off over the years, it can still grow like any other investment.
The funds will only be made available to the named account holder - that is, the child themselves - and no one else, and only when the child turns 18.
There's one exception to that, but it's not one we want to occur: should the child become terminally ill or die, the money can be accessed early, or by someone else.
Or it could stay put...
Once the named account holder reaches 18, the money is theirs to do with as they wish. Some might have lofty ideas about using it to pay for university, others may want to blow it all.
But they don't have to touch it at all.
Instead, the JISA will automatically convert into an adult ISA, with the adult annual allowance - and most importantly, it will remain tax-free.
That could go some way towards providing a deposit for a house, funding doctorate as well as undergraduate studies - or the party to end all parties...