What’s the alternative to a Child Trust Fund? …A Junior ISA

Hi Heather

My name’s Grace. I’m looking into saving money for my little one so that it can be invested in the same way as government-backed child trust funds. My older one has a child trust fund but I don’t know how to go about opening something similar for my younger child. As I understand it, banks don't offer government-backed child trust funds anymore.

The Money Spot™ - UK Personal Finance · #31 What’s the alternative to a UK Child Trust Fund? …A Junior ISA

Click image to read more about "lost" Child Trust Funds.

Hi Grace,
 
Thank you for this message.
 
In podcast episode number two, I talked about how you can save and invest for children in today’s world. All that information is still relevant so please have look at that post for ideas on the best saving strategy.
 
A Child Trust Fund (CTF) is a long-term tax-free savings account for children.
 
You cannot apply for a new Child Trust Fund because the scheme is now closed. The alternative available for today’s parents is the Junior Individual Savings Account or junior ISA.
 
What is a junior ISA?
 
A junior ISA like its adult equivalent is a tax-advantaged account that can be used for saving or for investing in the stock market. Once you place money into a junior ISA it cannot be withdrawn until your child is 18 and it legally belongs to your child so you would not have control over how that money is used.
 
This is not necessarily a bad thing but it’s something you will need to consider when you’re making a decision. I know a few people that don’t want to use junior ISAs because they don’t want their children having cash that they as parents can’t fully control. Personally, I think that I would still be able to guide my children about the wise thing to do with the money and if they didn’t want my advice that would still be useful information for me to know.
 
My approach is that because you won’t have full control over the money you might want to limit how much you put into the junior ISA so that your child doesn’t have too much money available at the age of 18.
 
 
The junior cash ISA
 
Saving into a junior cash ISA is like saving into any bank account, it earns a very poor interest rate and is therefore not a great idea at a time when interest rates are so low.
 
A junior stocks and shares ISA
 
The alternative option is a junior stocks and shares ISA.
 
The value of the stock market falls and rises but when money is invested over a long period of time it tends to rise. For example if you are investing for a 10-year period or more you can have a reasonable degree of confidence that your investment pot will produce a good return – certainly a better rate than current savings rates.
 
In podcast episode 2 you will see that my strategy is to invest £4k/year from birth to age 5 and then stop once I have put £20,000 into each child’s ISA.
 
Once I reach that I stop and just watch the money rise and fall. My son’s £20k investment now has a value of £26,000 and he isn’t 6 years old yet. If the stock market enjoys a 10% return on average over the next 14 years he will have just over £100,000 in his stock account from that £20,000 that I invested – that is the miracle of compounding, something Einstein called the 6th wonder of the world.
 
Even if the pot only grows at half that rate, that is at 5%, he’ll still have £50,000 – that’s a princely pot of cash that could be used for university or a deposit on his first home.
 
How to set a Junior ISA up
 
If you want to open a junior stocks and shares ISA there are many brokers you can use. To start off with, I would suggest you look into

• Hargreaves Lansdown or
• Fidelity

 
I have provided you with links to pages that will give you  more information on the junior ISA.
 
Personally I use Hargreaves Lansdown for my children. The fee for using the platform is 0.45% per year versus 0.35% at Fidelity.
 
HL have a user-friendly app and have made setting up direct debits so that investing for my kids is easy.
 
The key difference between HL and Fidelity besides the platform fee is that Fidelity also create investment products and may therefore have an incentive to push some of their own products to you. HL aren’t completely innocent though, they earn more if you invest in actively managed funds so they have an incentive to recommend actively managed funds to you.
 
The best strategy is to know what you want to invest in. As a new investor you might want to keep things simple and put the money in low-cost diversified index funds. These are funds that are invested in many companies so you won’t be putting all your eggs in one basket.
 
Here are example of funds that my children are invested in:

• FundSmith Equity, Class I – Accumulation
• Lindsell Train Global Equity, Class D – Income
• L&G Global Tech Index, Class I – Accumulation
• L&G International Index Trust, Class C – Accumulation

 
I have given you a link to each fund’s page so that you can read more about what the funds are invested in and what the fees look like.
 
I hope this helps you kick start investing for your children. Junior ISAs do not have the government boost that the Child Trust Fund did but they are a very similar product and have much more flexibility attached to them because you can invest in a wide range of products.
 
Even if you start of with a small amount, it will give you some confidence and you will begin to learn how the stock market works. Investing for our children is the path that got us investing for ourselves too.
 
Good luck and keep in touch.

Heather
​p.s. subscribe to my podcast and ask me any money question, HERE - do it now!