September 21st, 2020
What to do with your Child Trust Fund
Back in 2005, the Labour government were keen to tackle the issue of child poverty by giving every child in the country a helping hand.
To do this, Gordon Brown, the Chancellor at the time, launched Child Trust Funds – a £250 voucher that allowed parents to open a fund for their child. As they were backdated to children born in 2002, the first Child Trust Fund babies will turn 18 this September, giving teenagers a useful windfall.
And, these funds will mature at the rate of around 55,000 a month right through until January 2029.
If you had a child born between 2002 and 2011 then it’s quite possible that they will be receiving a cash windfall over the next few months and years.
Which? say that the average teenager with a maturing account will get £650 each, however, research from investment firm Unity Mutual shows that almost half of teens will receive upwards of £5,000, and a quarter will access more than £20,000.
Here’s your complete guide to what Child Trust Funds are, and what happens when they mature.
Long-term savings for children born between 2002 and 2011
Back in 2005, the financial secretary to the Treasury, Stephen Timms told the BBC: “We are aiming really to do two things.
“One is to boost the culture of saving, because virtually from birth every child will know that there is an account which has been set up for their benefit.
“We [also] want to make sure that every single young person has a worthwhile financial asset available to them at the age of 18. That has always been the case in well-off families. We want it to be the case in every single family.”
Under the initiative, every child born between 1 September 2002 and 2 January 2011 was awarded a cash ‘endowment’. Most children received a payment of £250, while those from the poorest families received £500.
A few hundred thousand children (those whose seventh birthday fell between 1 September 2009 and 31 July 2010) also received a top-up payment from the government – again either £250 or £500.
George Osborne scrapped Child Trust Funds in 2010, and stopped/reduced the payments after 31 July 2010. No child born after 2 January 2011 was entitled to one and Child Trust Funds were replaced with Junior ISAs, which didn’t offer a government incentive.
What’s been happening to your Child Trust Fund
Even though the coalition government abolished them in 2010, the government allowed those Child Trust Funds already in existence to continue. Many parents, grandparents and friends continued to top up the accounts.
Firstly, we should mention that, since 2015, it’s been possible to transfer a Child Trust Fund to a Junior ISA. You may already have taken this step to benefit from a better return.
If not, read on!
If your child is turning 18, your first step is to track down their Child Trust Fund. Providers are sending out statements just before an account holder’s eighteenth birthday showing how much the fund is worth and what to do next.
Many people may simply have forgotten that the fund exists. Last year, consumer group Which? estimated that this could apply to as many as three million children and young people, covering accounts containing as much as £2.5 billion.
If your child hasn’t received a statement, they should check who currently holds the money. HMRC has developed an online tracker to help people trace their fund.
When you have established who the fund is with, and you’ve obtained a value, you don’t have to panic as the money will continue to be held in a protected fund until they are ready to decide what to do next.
What to do with the proceeds of a Child Trust Fund
With a Child Trust Fund, the money belongs to the child. They can take it out when they are 18, at which point they can spend it on whatever they want or reinvest it.
While the original voucher to open the Child Trust Fund came from the government, you, friends or other family members may have topped up the fund over the years and may have a view on what the money should be used for.
If there is a substantial sum in the fund, it could be worth including your child in conversations with your financial adviser. Many advisers encourage inter-generational planning, and getting your child involved at an early age can help them to understand the benefits of putting a plan in place.
Here are three possible options.
- Cash it in
Once your child turns 18, they can contact the provider and ask them to pay the money into their current account. Their Personal Savings Allowance (up to £1,000 for basic-rate taxpayers) and Capital Gains Tax allowance (£12,300 for 2020/21) could be enough to protect any gains from tax in the short term.
If the value of the Child Trust Fund is significant, we recommend you take advice from a professional.
- Transfer it to an ISA
If your child has turned 18, they can open an adult ISA, including the Lifetime ISA.
While new rules mean any transfers won’t count towards the £20,000 limit in a Cash or Stocks and Shares option, transfers to a Lifetime ISA will count towards the £4,000 limit.
- Leave it
If your child does nothing with the money, the Child Trust Fund will either transfer it to an ISA, if they offer one, or they will transfer it into a ‘protected account’, where it will remain tax-free.
Get in touch
If you have a child or grandchild whose Child Trust Fund is maturing, we’d be delighted to provide advice on what they should do next.