Child Trust Funds: the Junior ISAs to move your money to

Transfers will soon be possible, but where should your money go?

Within days the Government expects to pass legislation allowing parents and guardians to ditch poor-value Child Trust Funds (CTFs) and transfer the money into low-cost Junior ISAs. 

CTFs were the brainchild of the last Labour Government, but were replaced with Junior ISAs by the Coalition Government. Transferring money from CTFs into Junior ISAs was not permitted, though that at last restriction appears to be ending.

Most stocks and shares CTFs are simply too expensive, often providing a basic UK index-tracking fund for a fee of 1.5% a year, which is obscenely high for a tracker. Critics of CTFs describe them as high-charging, confusing 'zombie' products. In particular, Friendly Societies and other mutual organisations have come under sustained fire for marketing high-cost, inflexible CTFs.

In contrast, Junior ISAs boast higher interest rates on cash and lower management fees for investments, meaning table-topping Junior ISAs offer far better value than CTFs to young savers and investors. So if your children or grandchildren are currently lumbered with a rubbish CTF, be ready to switch as soon as the new rules are in place, probably from 6th April.

Best Buy Junior Cash ISAs

The simplest form of Child Trust Fund is the cash version.

Many cash CTFs offer rates below 2% a year, with the very best barely reaching 3% or so. In contrast, these five top Junior Cash ISAs all offer tax-free savings rates of at least 3% a year:

Source: Moneyfacts.co.uk, 23/03/15

* Parent or guardian must hold a Halifax Cash ISA to qualify for this rate

Open a Junior ISA today

Finding a low-cost Junior Stocks & Shares ISA

With Junior Stocks & Shares ISAs, your goal should be to find a provider charging low fees for the portfolio of investments your child has. Be aware that there are three levels of charges:

1. Fees for providing the ISA wrapper or fund platform. These may be percentage-based (based on the value of a portfolio) or flat fees. Generally speaking, flat fees are not a good idea for JISAs, because most contain relatively small sums.

2. Fees levied by underlying funds. For actively managed funds, these can exceed 1% a year, but should be below 0.1% a year for cheap index trackers.

3. Dealing fees for buying and selling shares, if you wish to hold individual equities inside a JISA. Obviously, the lower these commissions, the better - especially if you plan to trade frequently.

So what you pay depends entirely on how to choose to invest. If you're looking to invest in a simple index-tracking fund, then this can be done for around 0.5% a year inside a Junior ISA. This is a tidy 1% a year less than the 1.5% yearly fee charged by most CTFs.

For example, the popular Fidelity Index UK tracker fund charges 0.08% a year, plus JISA fees on top. Many providers have the same charging structure for Junior ISAs as for adult ISAs, meaning it is possible to invest in this tracker for under 0.5% a year.

Here is a comparison of how much six popular ISA providers charge in yearly fees for accessing this fund (or, if not available, then a similar tracker) via a Junior ISA:

* HL has negotiated a lower fee from Fidelity of 0.06% a year for its customers.

** L&G UK Index Trust

*** Scottish Friendly UK Tracker Fund

**** Scottish Widows UK Tracker Fund

As you can see, with true low-cost providers such as Fidelity and Bestinvest, it's possible to track the UK market inside a Junior ISA for a yearly fee below 0.5%. At the other end of the scale, we have rip-off JISAs from Scottish Friendly and Halifax still charging a whopping 1.5% a year.

In short, when switching from CTFs to Junior ISAs after 6th April, pay close attention to the layers of fees you are paying. Anything more than, say, 0.60% a year for an index-tracking fund is a complete rip-off.

Open a Junior ISA today

More on saving and ISAs:

Peer-to-peer ISAs: what happens next?

The best Cash ISAs for the 2014/15 tax year