Inter-generational Planning and the new Novia JISA
- Author : Lee Badger
- Date : 19 Jan 2021
Inter-generational planning is about passing on wealth in the most effective way, so there is clearly potential for Advisers, as experts in the field, to play a key role. In this article we are going to investigate the fast-growing savings and investments market for children and grandchildren to assess the ongoing opportunity for Advisers to provide their services.
Why is this relevant now?
Well, in September 2020, a wave of Child Trust Funds (CTFs) began to mature:
- Starting from September these windfalls will run all the way through until January 2029, with about 55,000 teenagers each month becoming entitled to a pot of cash
- More than 6.3m CTF accounts were opened holding an estimated £9bn
- The combined estimated maturity value this year is £2.4bn, according to analysis by CTF provider The Children’s Mutual (now Foresters Financial)
If parents had saved consistently over the years, some soon-to-be-18-year-olds could be sitting on a windfall of £33,564! (Based on someone who got the two £250 government contributions and whose parents have added £100 a month since birth and invested it in the FTSE 100).
These maturing investments are in addition to all the funds sitting in Junior ISA accounts (JISAs). This sector has seen growth year on year since launch in 2011 with a total of £974 million subscribed to JISAs in 2018-19.
Additionally, a rule change in 2015 allowed for a tax efficient transfer from a CTF – with its potentially more limited investment choice – to a more open architecture JISA.
HMRC data from 2019 shows that of the £4.8 billion contributed to JISAs, more than 50% was in cash, which most financial commentators would suggest is a poor long-term home for wealth because of the corrosive effects of inflation. Following that line of thought, many would say that parents and grandparents could benefit from investment advice to help them get better outcomes for their children and grandchildren.
There is an opportunity for Advisers to help parents manage their children’s investment through a platform alongside their own investments, and for these Advisers to then develop secondary client relationships and build their next generation of family clients when these children become legally entitled to their savings at 18, helping them to navigate the investment world.
True, there are different views in the market about what 18-year-olds will decide to do with their savings when they officially take control of them at maturity. However, with HMRC amending the ISA regulations to allow savings transferred from a matured CTF to be discounted for the annual ISA subscription limit, the hope is that many will keep these pots for the future.
At Novia Financial we feel this market has now become an important one and so to support our Adviser firms we are launching a JISA on 1 February 2021.
Increased contribution limits give greater scope for tax planning
In the last budget an increase of the Junior ISA contribution limit to £9,000 for 2020/21 was announced. Assuming compound growth of 5% and using the maximum allowance each year, new parents could now accrue more than £250,000 for their child by their 18th birthday…. again, a staggering amount from a pure tax planning perspective.
How does a JISA differ from a CTF?
It’s been possible to transfer a CTF into a Junior ISA since April 2015. In some cases, this might be desired because of an appetite for a less restrictive investment strategy, or it could be to make use of improved functionality, such as 24-hour online access. Looking at the table below, it could certainly be argued that JISAs generally offer more flexibility, choice and investment options than the most common CTF structures.
|Basic Stakeholder CTF||JISA|
|Tax efficiency||Free from capital gains tax and no UK tax to pay on income. No need to declare on tax return.||Free from capital gains tax and no UK tax to pay on income. No need to declare on tax return.|
|Investment Choice||Limited – money is often invested in index tracker funds, e.g. tracking the FTSE100.||A wide range of options:
- Generally, over 2,000 funds choices
- A range of DFMs
- A cost-effective range of ETFs allowing cheaper cost to investments
- Cash can also be held
|Charges||Annual management charges on stakeholder CTFs are|
capped at 1.5%. Many providers charge the full fee.
|Can vary significantly, depending on the investments chosen. Lower cost options
|Lifestyling||Lifestyling, with a shift to lower risk investments closer to maturity, is no longer mandatory when a child reaches 15, although|
some providers will still offer it, and if lifestyling is implemented
and parents want to opt out, the onus is on them to inform the provider
|Parents and advisers can choose how to invest to match their objectives and attitude to risk over the defined investment period.|
|At age 18||A decision will need to be made about what to do with the money. The child can decide to take the cash or transfer to an adult ISA. If no decision is made the CTF provider will put the money in a ‘default’ account – either a ‘matured CTF’ or an ISA, depending on what the provider decides to|
do, until the child makes decision.
|The Junior ISA remains invested and automatically
converts to an adult stocks and shares ISA.
|Functionality||Many CTF providers only allow the account to be managed via the post or over the phone.||24/7 account access online and the parents can link a Junior ISA to their own account, making it easy to manage all the family investments in one place.|
As with any advice point there will be considerations about the most suitable tax structure and investment strategy for the child and their parents, but with the new annual contribution limit and the wave of capital that’s accrued in JISAs and with CTFs now maturing, this could be an opportune time for Advisers to engage with their clients to discuss this growing area of tax planning.
If you would like to find out more about the new Novia JISA, call us on 0345 680 8000.
For more information on CTFs, see https://www.moneyadviceservice.org.uk/en/articles/child-trust-fund-accounts
For more information in JISAs, see
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