Child Trust Funds: Coming of age

28/02/2020

Almost 18 years on from the launch of Child Trust Funds (CTFs), the first beneficiaries of the policy will soon be able to get their hands on their natal gift.

Glossary

For explanations of the investment terms used throughout this article.

View the glossary

Whether they know it or not, every child born in the UK between 1 September 2002 and 2 January 2011 – more than six million in total – had one of these accounts opened in their name. Into each, the government deposited £250, topped up in some cases based on family income.

These small pots, intended to give every child a leg up in young adulthood, should have increased in value over the years. If they were kept in cash, they will have been inflated by interest. If invested in stocks and shares, in many cases they will have risen even more.

Indeed, it has been estimated that these savings accounts now have a combined value of £9.3 billion, taking into account extra contributions by those parents and relatives who could not only afford to make them, but were aware of CTFs in the first place.

Estimates vary but, back in 2015, HM Revenue & Customs said that more than 700,000 accounts remained dormant. On this basis, at least £175 million – plus interest, growth and government top-ups – is sitting in CTFs unbeknown to children or their families. According to the Share Foundation, as many as one in six accounts are dormant, implying the value of this unclaimed pot is probably closer to £1 billion – if not more.

Is your child sitting on a small nest egg?

Remember, a CTF account was opened for every child born in the UK between 1 September 2002 and 2 January 2011. So even if you can’t find the paperwork, the money will still be there, waiting to be accessed.

The sums involved may not be fabulously large, but they are certainly worth a little time and effort to track down. After all, not only is it “free” money, but the account should probably have grown in value – possibly by quite a lot, if it has been invested – since the day they were born.

Helpfully, if you have lost track of a CTF, there is a free government tool to help you trace it – link here. After filling in the online form, HMRC will send you details of the account’s provider by post within three weeks of receiving your request.

What are your child’s options?

The good news is that there is no deadline for action. If the money is left in the CTF, under new rules it will automatically be moved to an adult Individual Savings Account (ISA) when they turn 18. Importantly, this means it retains its tax-advantaged status – namely that any income or capital gains earned within the wrapper will be enjoyed tax-free.

If your child plans to keep this money saved or invested, rather than treating themselves to an 18th birthday present – and that could be a big ‘if’ – it is worth them checking they are in the most suitable account.

After all, there are many ISA providers. In the case of cash ISAs, some will offer higher interest rates than others. For stocks and shares ISAs, each provider will offer different investment choices and levy their own level of charges. It is normally worth shopping around.

Why wait until their 18th?

If an under-18 is looking to keep their money invested, be aware that charges on CTF accounts are commonly, if not always, much higher than on Junior ISAs. Over time, higher charges can significantly curtail investment growth.

Switching to a Junior ISA could not only be more cost-effective, but could also offer more investment choice. If you decide it is the right choice for your child, as a parent you can instruct the transfer to a Junior ISA on their behalf, whatever their age. If the account holder is 16 or older, they can do this themselves.

Moving accounts should be straight forward, too. From application, the transfer process should take around a month to complete. (Please remember that it’s only possible to transfer the full balance of a CTF to a Junior ISA. Partial transfers cannot be made under government rules, and the process is irreversible – it is not permitted to convert a Junior ISA back to a CTF.)

While many Junior ISA providers, including M&G, do not charge entry or exit fees, bear in mind that CTF providers might impose exit charges if you transfer funds out.

When you’re thinking about investing through an ISA or Junior ISA, it’s important to remember that ISA tax rules may change in the future. The tax advantages of investing through an ISA will also depend on your personal circumstances.

We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.