Last week’s Budget contained at least two measures which will affect all parents.
The first will help parents save for their child’s future, whilst the other could provide much needed cash assistance towards the costs of childcare; but beware, there will also be losers.
Child Trust Fund transfers to Junior ISAs
The first piece of good news came with George Osborne’s announcement that the government is to issue a consultation with a view to enabling child savers to transfer their Child Trust Funds (CTFs) into Junior Individual Savings Accounts (ISAs).
CTFs were launched in 2005 and were designed to encourage parents and grandparents to save, in a tax-efficient way, for their children and grandchildren’s future. Savings could be held in deposit accounts or invested in the stock market and for a time, the government also contributed £250 on the birth of a child with an additional payment a few years later.
However, the coalition government abolished the £250 vouchers, introduced the Junior ISA, and stopped new CTFs being opened, although contributions to existing plans could continue up to the annual limit of £3,600, which also applied to Junior ISAs.
With no new CTFs being opened, fears grew that with the spotlight off CTFs, banks and building societies would take the opportunity to pay lower rates of interest on CTFs than they do on Junior ISAs, whilst it was also thought fund managers would push up charges.
These fears seem to have come true. The Halifax, for example, pays a market leading 6% per year on their Junior Cash ISA, whilst the best CTF, from the Furness Building Society pays just 3.05%. When it comes to investing, two providers of CTFs, Witan and F&C have recently put up their annual management charges.
According to the Government six million savers, with nearly £5 billion in CTF’s, will benefit from the new rules, which have yet to be firmed up, as the government plans to consult on whether transfers should be voluntary or mandatory.
Whilst it is a shame that the new rules are unlikely to take effect until 2014, it is still great news that CTFs ought to be able to be transferred into Junior ISAs. Not only will it simplify the children’s savings market, which in itself should encourage more people to save, less children will be left in uncompetitive CTFs and with fewer dormant accounts to run, providers should also be able to offer better rates of interest or lower charges.
Help with childcare costs
Whether you use a CTF, or a Junior ISA, saving for your child’s future is hugely important, but so is meeting day to day costs, the largest of which for most families with working parents is childcare. To the delight of many parents and the anger of some George Osborne has announced a new childcare voucher scheme.
The new system will give the tax breaks on a per child basis, which means it will favour larger families. Furthermore, self-employed parents, currently exempt from the existing scheme, will also be able to claim.
However, compared to the current scheme there will be losers, including those families where one parent stays at home, smaller families or where only a limited amount of childcare is used.
The new scheme, which is scheduled to start in autumn 2015, will allow parents to claim vouchers to subsidise the cost of care for all children up to the age of five. Parents will be able to claim up to £1,200 per child under the scheme, which will initially help 1.3 million families; the government plans to extend the scheme to allow parents to claim for children up to the age of 12 by 2020.
The scheme will work by exempting parents from paying basic rate tax, at 20%, on the first £6,000 they spend on child care each year. To be eligible both parents must work, neither parent can earn more than £150,000 per year and to claim the full amount the family must spend £6,000 per year per child; if the cost of childcare is less, the benefit will equal 20 pence per £1 spent.
It is unclear whether National Insurance, at a rate of 12.8%, will have to be paid on money used to meet childcare costs; at present this isn’t the case and if this were to change it would severely reduce the attractiveness of the scheme.
Parents who are currently claiming under the existing scheme will be able to continue to do so or switch to the new arrangements from autumn 2015; they will therefore not lose out if the existing scheme is more advantageous.
More details to come
As with any announcements such as these, the full implications will only be known when all the details are revealed.
The expected new rules allowing transfers from CTFs to Junior ISAs are likely to produce very few losers. The same however cannot be said for the new childcare voucher system, which looks likely to be complex and produce both winners and losers; only time will tell which will apply to you.
Our team of Independent Financial Advisers in Nottingham are experienced in developing cash flow plans for parents the length and breadth of the UK, if you have children and would like advice on your savings options call one of our IFAs today on 0115 933 8433.