It is more than a decade since the government introduced the Child Trust Fund (CTF) and next month will mark four years since the launch of its successor, the Junior ISA.
From Child Trust Funds to Junior ISAs
Both schemes offer tax incentives for parents to put money aside to help their kids eventually deal with the financial challenges of early adulthood, such as university tuition fees and taking a first step on the property ladder. The CTF was open to any children born after the start of September 2002 and originally allowed up to £1,200 a year to be saved in a cash or shares-based account.
This was on top of a £250 government voucher issued when each account was set up (or £500 for children in lower-income families) plus a further £250 or £500 at age seven.
In the wake of the financial crisis, this generosity was decided to be unsustainable. First the cash handouts were stopped in 2010, and then CTFs were replaced by Junior ISAs a year later, with the annual saving allowance raised to £3,600 (this has since increased to £4,080).
Majority opt for low risk, low return cash ISA
Both CTFs and Junior ISAs have proved popular, but despite the long-term nature of both programmes – the money is locked up until the child turns 18 – a majority of parents appear to be opting for cash accounts rather than taking on the extra risk of shares.
Figures from investment firm Hargreaves Lansdown show that of the £582 million subscribed into Junior ISAs in the 2014-15 financial year, £405 million – fractionally under 70% — was put into cash accounts paying somewhere in the region of 3% a year.
These returns might be higher than are on offer at the moment on standard ISAs or other deposit accounts. But they are still much lower than the yields most investment experts would expect the stock market to generate over the periods of a decade or more.
Could peer-to-peer be a better option?
It is understandable given the recent volatility in the markets that many mums and dads are not keen to risk their children’s nest eggs in equities. There could, therefore, be a role for peer-to-peer lending to play in investing for kids.
Parents would have to make loans on their children’s behalf, but with the introduction next April of the Innovative Finance ISA – which will allow at least £15,240 a year to be lent with interest free of income tax – the same tax incentives as Junior ISAs would be in place. Returns, on the other hand, would be higher at around 5% a year for longer-term lending.
While the risks attached to P2P are higher than on savings accounts, they are lower than would be faced in the stock market.
Spending their funds
As a footnote, another feature of CTFs and Junior ISAs is that the money held in them becomes the legal property of the child when they turn 18. In theory, then, they can do whatever they like with their cash when they turn 18: this has in the past prompted concerns among some parents about spending sprees and other irresponsible behaviour.
But these fears may be unfounded. Reassuringly, the Hargreaves Lansdown figures show that 97% of their Junior ISA holders keep their accounts for at least a year after turning 18, while almost half make extra contributions to their funds.