05 Mar Child Trust Funds
If you turned 18 in the last six months or are the parent of a child who has turned or is about to turn, 18 then you or your child might have been one of the first to have savings in a Child Trust Fund (CTF).
You might recall (if you’re a parent) that CTFs were introduced in January 2005 to encourage saving and to try and ensure that all children had some savings when they turned 18. All children born after September 2002 were eligible, and initially the government gave each child a voucher for £250. At age 7 these children were supposed to receive a further voucher of £250, however, not all children received this as CTFs were abolished at the end of 2010 and although existing CTFs could continue, the government top ups ceased.
CTFs were then replaced by Junior individual savings accounts (JISA) and eventually you could transfer existing CTFs to JISAs. In both cases the savings are held in tax-free accounts.
CTFs and JISAs allow anyone to make additional contributions on behalf of the child. Any funds accumulated in the account legally become the child’s at age 18.
What this means is that if you or your child has turned 18, or is about to, they could have a sum saved or invested in a CTF. You might have already been contacted by the provider or have dealt with the funds, but if you’ve got no idea whether they have one or you know they do but you’ve lost the details, the government has set up a way you can find out.
If the CTF provider is able to offer adult ISAs then the CTF will be converted to either an adult investment ISA (if the CTF was a stocks and shares CTF) or to an adult cash ISA (if the CTF was a cash CTF). Both of these options allow ongoing subscriptions to the ISA (currently up to £20,000 per tax year) and the ability to transfer to another ISA provider if circumstances change or a different ISA is required.
If the provider doesn’t offer ISAs and the funds are not withdrawn, the CTF will be converted to a ‘HMRC protected account’ that retains the CTF and ISA tax benefits but can’t receive further contributions.
If you or your child know who their CTF provider is and they’re coming up to age 18, then I suggest contacting the provider to find out what they can offer. If this is an adult investment ISA, find out what the charges and investment options are. Are these investment options still suitable? If it will be converted to a cash ISA, is this still the best type of asset for the funds? Could they be transferred after age 18 to a more suitable ISA or even used for subscriptions into a Lifetime ISA (LISA)?
To answer these questions and consider what to do with the funds, it’s important to decide what they’re going to be used for and when.
We always find that a good starting point is to consider the appropriate underlying investment mix, starting with cash and then considering a mix of equities and fixed interest securities (whose values are generally less volatile).
If your child is going to want to spend the funds in the next 5 years, consider leaving the funds in cash but if a longer time frame is more likely then, depending on their understanding and appetite for risk, the funds could be invested in a combination of equities and fixed interest. Either way, this is a good opportunity to start teaching them about savings, investments and investment risk. We have lots of tools on our website and YouTube channel.
This leads to the decision on what type of ISA to either leave or transfer the funds into. Obviously, if the funds are needed in the next few years a cash ISA paying the highest rate of interest is the best option, however, if the funds can be left for a longer period then it might be worth considering an investment ISA.
You might also want to consider using some of the funds for LISA subscriptions as these receive a 25% government bonus and can be used as a long term savings plan similar to, or as an alternative to, a pension. The basic details of LISAs and differences between these and a pension plan are summarised in our recently published infographic.
You might be considering using some, or all, of any funds in the CTF to pay for university tuition fees, but before doing so make sure you’re fully aware of the student loan terms, particularly the flexibility around repayment. It might be some years before the loan starts to be repaid, if at all, and having the choice to retain funds in an ISA for a house deposit or using them to repay the loan in the future if repayments start, might provide more options in the future.
Whatever you or your child decide to do with their CTF make sure that you at least find out what it’s worth, where it’s currently held and what options you have with the existing provider. Then give some thought to what the funds might be used for and act accordingly.
This blog is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person. Your capital is at risk when investing. Past performance is not a reliable indicator of future results.