Start at January 2011 : Coalition Government will Scrap Child Trust Fund

The UK's coalition government announced on Monday 24th May that the Child Trust Fund scheme will be gradually reduced over the course of this year. It will then be scrapped completely on the 1st of January 2011 subject to final legislation being put into place. What does this mean to existing/new parents?

Child Trust Fund Payments Will be Reduced Over 2010

Until this announcement the government gave a Child Trust Fund payment of £250 (£500 for low income families) to parents on the birth of a child to be invested for their future. This was then topped up when the child reached the age of 7. From August 2010, this scheme will be subject to change with reduced payments and will gradually be phased out.
From the 1st August 2010 the payments given at birth will be set at £50 for families on average/higher incomes and at £100 for those on lower incomes. The age 7 top-up payments will also cease from this date. Those with disabled children have been given other top-ups in the past. These will be continued until January next year. At that point the Child Trust Fund system will close down in terms of new or further payments.

What About Existing Child Trust Fund Accounts?

The closure of the Child Trust Fund system will see an end to government payments. But, parents with an existing Child Trust Fund account or those that will qualify to open one with a reduced payment in 2010 can still continue to save under the scheme.
For example, they, their families and their friends can still make their own contributions into an account (currently set at a maximum of £1,200 a year). Growth will still be given tax free status, parents can switch account types under current rules if they wish and the accounts are still not accessible until the child reaches the age of 18.

Why is the Government Ending Child Trust Funds?

The Child Trust Fund scheme is being scrapped as part of the coalition government's cost-cutting measures. It is thought that closing down the system will save £520m. David Laws, the new Chief Secretary to the Treasury, said that giving people money that was essentially being borrowed by the government was "deceiving" them.

Parents May Want to Look at Other Ways to Save for Their Children

Child Trust Funds were popular with many parents as they gave them the ability to start saving for their children's future with funding from the government. Many used these payments, and any allowance they were given to save on their behalf, to invest in accounts that could, for example, help defray college costs later in life.
Those that are keen to carry on investing or that need to make a start when they have a child may want to look at other ways to save. Parents in this situation may find the following articles useful:

• A Guide to Tax Free Savings
• 2010/11 ISA Allowances are Increased to £10,200
• How to Choose the Best Investment ISA
• How to Find the Best Cash ISA Savings Rate

 

A Guide to Tax Free Savings

 

The interest rates on savings accounts aren't currently that impressive. Consumers with money to save often find that a lot of the interest that they can earn gets eaten up by the tax they have to pay. There are, however, a range of tax free savings options that may be worth considering to avoid this happening.

ISAs (Individual Savings Accounts)

ISAs have been around since 1999. These accounts allow an individual to save money and/or invest in the stock market in specially designed accounts. Any interest that is earned from ISA accounts is paid tax free.

These accounts have savings/investment limits imposed on them. So, for example, an individual is given a tax free ISA allowance of up to £7,200 a year. Up to £3,600 of this can go into a cash ISA. The rest, or alternatively some or all of the total allowance, can be used in a stocks and shares ISA. Individuals aged 50+ in the 2009/10 tax year are now allowed to save up to £10,200 (to a maximum of £5,100 in a cash ISA). The extended allowance will apply to everyone else from April 2010.

(NS&I) National Savings & Investments

Accounts from NS&I are managed by HM Treasury. Individuals that invest in their products will basically be investing in the government. Some of the options on offer here are designed to give tax free savings. These include:

• Premium Bonds
• Index-Linked Savings Certificates
• Fixed Interest Savings Certificates

Although a consumer can access their savings when they like with NS&I savings certificates products, these are often viewed as medium/long-term savings as the best returns will come over time.

CTF (Child Trust Funds)

CTFs are savings accounts for children that are funded by the government. These accounts were set up to help children get a good start to their adult lives and are designed to be accessed once the child turns 18.

Parents with a child born on/after 1st September 2002 are given a voucher from the government to open an investment or savings account for their child. They will also get an additional voucher when the child turns 7. Low income families qualify for additional funding. An extra £1,200 a year can also be put into the account by family or friends of the child or by the child itself every year.

Tax Free Savings and Pensions

Although individuals may be taxed on part/all of their pension payments when they start to be made, they may benefit from tax free savings benefits before this point. Pension contributions are not taxed while a fund is being built up via the tax relief system. So, individuals that have a personal pension and that use money that they have already been taxed on to pay into it can claim it back in tax relief up to limit of their pension allowance.

Income Tax Allowances and Savings

As well as thinking about tax free savings, some individuals can also use their tax allowance to save money. Each individual in the UK can earn up to a certain amount every year before they are taxed. This rate currently stands at £6,475 for the 2009/10 tax year. Those who are not tax payers or who earn under their limit do not have to pay tax but, if they have standard savings accounts, their bank/building society will tax their interest automatically

A non-tax payer can use an R85 form (available from their bank or building society). This will prevent the bank/building society from taxing interest at the source. Those with low incomes may also want to see if they can claim back any of the tax they may have paid on standard savings accounts.

Just because these savings options come tax free doesn't mean that consumers should forget about checking out all their options before taking one out. ISA interest rates, for example, can vary a lot and comparing savings accounts deals and offers may be well worth doing before choosing a product.

2010/11 ISA Allowances are Increased to £10,200

During 2009 the ISA tax free savings allowance changed from £7,200 to £10,200 for those aged over 50. During the 2010/11 tax year the increased amount is being rolled out to all UK consumers that wish to open an ISA account or to contribute to an existing product. How can the new Individual Savings Account allowance be spent?

ISA Allowances Can be Used in Both Cash and Investment Accounts

As in previous years consumers can choose where to put their savings. They can use a cash or an investment ISA or a mix of the two. They cannot exceed their allowance of £10,200 but they do not have to use all of it in any given tax year. There are specific rules on how this can be allocated to each specific ISA type.

How Much Can be Saved in Each Type of Individual Savings Account?

How the 2010 increased allowance can be used depends on how the individual wants to save or invest it. Basically, it is possible to:

• Invest up to half of the allowance in a cash ISA.
• Invest up to half the allowance in a cash account and up to half in an investment product.
• Invest up to all of the allowance in an investment ISA.

In other words, it is not possible to save more than £5,100 in a cash ISA but individuals can save up to their entire allowance in an investment product if they do not wish to take up a cash savings option.

So, for example, an individual with the full £10,200 to spend that wants to use both kinds of accounts could split their allowance evenly between cash and investment ISAs. Or, if they prefer, they could place a lower percentage in a cash account and a higher percentage in an investment product.

How Many ISAs Can be Opened or Used in a Tax Year?

Individuals are limited to opening/using one account of each ISA type each year. So, they can save into one cash account and one investment account. They don’t have to take out both options but they cannot use more than one of each in every tax year.

Cash ISAs are available to those aged over 16. Investment products cannot be used until the individual reaches the age of 18. ISA transfers are possible and this may be worth looking at as savings are built up if it makes financial sense to change provider or, in some cases, the type of account used.

Before choosing which kind of ISA to use and which provider to sign up with it may be worth checking out options in more detail. Cash ISAs may be risk-free but it’s a good idea to check out where and how to get the best deals to maximise returns. Investment ISAs may come with a greater risk and investigating the types of account on offer with these products may therefore be worth doing.

How to Choose the Best Investment ISA

 

Those looking to use up some or all of their investment ISA allowance are faced with a variety of options. Unlike cash ISAs which tend to work in one simple way, an investment ISA can take many forms. Consumers may want to put some time into thinking how and where they invest their money to try and get the best returns.

Common Types of Investment ISA

There are a few different options to choose from here. In basic terms the consumer can opt to:

• Take out a managed investment product where their money is actively invested by a funds manager.
• Put their investment in a tracker investment ISA where their money is invested via a system that is linked to a specific financial index.
• Invest themselves via a self select ISA where they have a say in where their money goes.

Choosing between these options may not be that easy, however. They may all have different fees and may also come with differing degrees of risk

Things to Consider When Choosing an Investment ISA

Choosing any type of investment can be difficult. There are generally no guarantees of performance with standard products and investors may be asked to assess their risk comfort level when choosing a product. In general terms the following may be useful:

• Tracker ISAs may be cheaper in fee terms than managed products as they simply track an index and need no specialist input. For some, these out-perform managed funds.
• A successfully managed fund can give much better returns if the manager gets his/her investments rights and pulls some lucky rabbits out of the bag. But, there are no performance guarantees here.
• Self select ISAs may only give a decent return on investment if the individual knows what they are doing (or gets lucky).
• Income types of funds may give better immediate dividends and returns but may not perform as well over time. Standard investments may go the other way.

How to Get Help Choosing a Shares ISA

Most people won't know enough about investments to make a truly informed choice at this stage. They may know enough to go for income over long-term growth or vice versa according to their circumstances. Or, they may feel confident enough to try their hand with a self select ISA. Most, however, will compare investment ISA performance tables and go with a company that is currently doing well.

This may work out fine but consumers would do well to remember that past or current performance means nothing in long-term investment terms. A shares ISA with phenomenal growth now could tank a few years down the line for a variety of reasons. Its manager might make mistakes or leave the fund. The index it might be tracking may start to do badly.

It may be worth considering talking to an independent financial advisor to assess options against needs. This could at least help the individual better understand their options and which one(s) may suit them best. Checking the costs of a shares ISA (i.e. the fees that may be charged) is also important. There's no point spending more than is necessary to hold this kind of account and fees can vary in the sector.

Finally, those looking to open an investment ISA should check out their limits and conditions first to make sure they qualify for its tax free status. They may also want to think about their cash ISA options and to use rate comparison tables to help source the best deals.

How to Find the Best Cash ISA Savings Rate

 

Saving money in a cash Individual Savings Account (ISA) can make sense. These products give tax-free interest (up to certain limits). But, not all cash ISAs give the same returns. The interest given by any financial institution that offers this kind of product can vary wildly. What is the best way to find the best cash ISA savings rate?

Finding the Best Cash ISA Savings Rates

This really comes down to shopping around. Like any other interest bearing account the cash ISA will pay a rate of interest that is set by the company that provides it. Rates across the industry can vary a lot.

It may, therefore, be helpful to do a rate comparison before applying for a product. This is relatively easy to do as there are plenty of ways to find lists of current ISAs and their rates. An individual could, for example:

• Look at online savings rates comparison sites that either list savings rate across all products or that solely focus on ISAs.
• Check the financial press/financial supplements in newspapers to see their own comparison tables.

It makes sense to compare cash ISA rates before choosing a product to save in. Getting even a small boost in interest rates could help maximise returns and earnings.

Comparing Cash ISA Interest Rates and Options

Most ISAs will offer variable rates of interest that may go up or down according to market conditions. Some, however, offer fixed rates of interest, either for a short introductory period or on a longer term basis. These rates may look good but it may be worth checking:

• How long an introductory rate lasts for and what the underlying rate that will be given when it runs out will be. If this is low then the advantages of the initial rate may be lost and the individual may be better off with a standard option.
• Whether the rate brings with it any conditions such as limits or bars on withdrawals. Some accounts may only allow a certain number of withdrawals before interest penalties are charged. Some of the higher fixed rate options may not allow withdrawals at all for a set period of time. This may not be an issue if the individual won't need to access their cash but it may be important if they think they might want/need to.

Bear in mind that it is possible to simply up sticks and move an ISA to a new provider to get better rates in the future so this may be worth investigating as well.

Those interested in ISAs in general may find it useful to check up on the regulations and terms behind these products. The tax free allowance given here can also be used for investment based accounts. Those looking for alternative/additional ways to save without incurring tax may also find A Guide to Tax Free Savings useful.