Child Trust Funds: Reaching maturity

14/09/2020

There are many reasons why turning 18 years old is a milestone to look forward to. Generous gifts are not unusual to mark the occasion, but typically they come from family and friends.

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Those celebrating their 18th birthday from 1 September 2020, onwards have another present to look forward to – from the UK government.

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 increased 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 Child Trust Funds (CTFs) in the first place.

Is your child sitting on a small nest egg?

Estimates vary but, back in 2015, HM Revenue & Customs (HMRC) 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.

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.

Do not worry if you can’t find the paperwork – the money will still be there for your son or daughter, waiting to be accessed.

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.

If your child is thinking of keeping their nest egg invested, they may want to learn more about the different ways their money can be put to work.

They might, for instance, be interested in aligning their investments with their values. If so, there are approaches that invest sustainably or even aim to deliver shared returns for society and the environment, while pursuing financial returns for their future.

Talking through the pros and cons of whether to leave their investment pot intact will almost certainly be time well spent. A basic introduction to investing can help ensure they are more aware of its potential to build returns for later in life, when they may need it most.

Why wait until their 18th?

If an under-18 is looking to keep their money invested, one aspect to be aware of is 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 straightforward. From application, the transfer process should take around a month to complete. (One thing to bear in mind is 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, 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.

Please remember that the value and income from a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise sand you may get back less than you originally invested.