If you have a child or grandchild born between 1 September 2002 and 2 January 2011 then they could be set to receive a useful windfall in the near future.
That’s because the first Child Trust Funds (CTFs) start to mature this autumn. An initiative of the Blair government, and launched in 2005, CTFs were designed to give every child a kick-start to their savings.
So, what are CTFs? When do they mature? And what can you do with them when they do mature? Read on for answers to these questions and more.
A £250 savings boost for children
Back in 2005, the then Chancellor, Gordon Brown, introduced Child Trust Funds to encourage long-term saving for children. Each child born between 1 September 2002 and 2 January 2011 received a cash voucher of £250 (£500 for low-income families) which a parent could use to open a CTF account.
Your child or grandchild may also have received an additional government payment of £250 into the account at age seven.
The coalition government abolished CTFs in 2011 and replaced them with Junior ISAs.
When your child or grandchild turns 16, they can legally take on the responsibility for managing the account, and the money in a CTF transfers to your child or grandchild when they turn 18.
According to the Office for National Statistics, there are 6.3 million CTF savers in the UK. The expected windfall from a CTF could also be significant, as research from investment firm Unity Mutual found that almost half of teens will receive more than £5,000, while just over a quarter (27%) will receive more than £20,000.
How to find a lost Child Trust Fund
With many CTFs having been opened a decade or more ago, it’s possible that you may have lost track of where the child’s money is invested. This may be particularly true if the original CTF provider has merged, been taken over, or changed its name.
If you need to track down a lost Child Trust Fund, you can fill in an online form and ask HMRC where the account was originally opened. If you do have the child’s Unique Reference Number this will help, otherwise, their National Insurance number will do.
If your child or grandchild does not yet have a National Insurance number, HMRC say that you can contact them directly for help.
What to do with a Child Trust Fund when it matures
The first thing to remember with a Child Trust Fund is that the money belongs to the child, not to you. When they reach the age of 18 the money belongs to them, and you have no say in what they do with it.
So, it’s important that you sit down with the child and talk about your intentions for the money. There are three main options:
1. Do nothing
If the child does nothing when they reach their 18th birthday, the Child Trust Fund will mature and the provider will either:
- Transfer it into an ISA
- Transfer it into a ‘protected account’ where it will remain tax-free
2. Transfer it to an ISA
When the CTF matures, the child can transfer the funds into an adult ISA, including the Lifetime ISA.
New rules mean that any transfers into an ISA from a Child Trust Fund won’t count towards the £20,000 limit for a cash or stocks and shares option. However, transfers to a lifetime ISA will count towards the £4,000 limit.
3. Cash it in
Once your child or grandchild turns 18 years old, they can contact the CTF provider and ask them to pay the money into their current account.
While they will lose any of the tax benefits associated with a CTF or ISA, their personal savings allowance (up to £1,000 for basic-rate taxpayers) and Capital Gains Tax allowance (£12,300 for 2020-21) may well be enough to protect any gains from tax.
If the child has no idea what they want to use the money for, or you have earmarked it for something in the future, it could make sense to transfer it into an ISA in the short term. This ensures that the cash remains in a tax-efficient product.
Anna Bowes, co-founder of analysts Savings Champion, agrees. She says: “Regardless of what they decide to do long term, 18-year-olds should keep it in an ISA.”
Ultimately, whatever your child or grandchild decides to do, the most important thing is to have a plan and think about what it is they want to do with the money. Including parents and grandparents who may have contributed to the CTF in the discussion is likely to help ensure that the money is used in the way that it was intended.
Get in touch
If you have a child or grandchild expecting to receive a windfall from their Child Trust Fund and would benefit from advice on what to do next, we can help. Email email@example.com or call us on 01785 876222.