Child Trust Funds have come of age – we break down how they work
From the beginning of last month, teens turning 18 have been able to access their Child Trust Funds for the very first time.
The funds were set up by the Labour Government in 2002 to provide all children with a nest egg with which to embark on adult life, without parental control.
HMRC figures show more than 700,000 accounts, worth £1.6billion, will mature in the next year alone.
The total value of CTFs in the UK is estimated at more than £10billion but millions of accounts are still unclaimed as families have lost track of accounts or never activated them in the first place.
It is believed that 1.8million accounts are still unaccounted for – 30 per cent of all funds – with an average value of £1,600.
How much do I have in my Child Trust Fund?
All parents and guardians of children born between September 1 2002 and January 1 2011 inclusive received a voucher from the government to invest in a CTF provider. The amount varied between £50 and £500 depending on the child’s date of birth and the household income.
If the voucher was not claimed within a year the government invested it into one of 14 CTF providers on the child’s behalf.
Some children also received an additional £250-£500 on their seventh birthday. All payments stopped from 2 January 2011 when the scheme was axed.
At least £9.3billion is sitting in CTFs, of which around a quarter is still unclaimed. The current value of each of these accounts, if no additional funds have been added, is between £996 and £1,992.
Parents were encouraged to put regular savings into these accounts, from as little as £10 a month up to £4,368 a year.
Those 17-year-olds whose parents saved just £10 a month, based on a maximum government investment of £500, would now have £3,610 in the account.
Locating your Child Trust Fund
If you or your parent or guardian know the CTF provider but have lost access details, they can be found via the government website.
If you do not know the fund provider or did not set up the account yourself at the time, you can trace the CTF at gov.uk/child-trust-funds. This includes accounts for adopted children.
Once you or a parent have completed the form, you should receive a response within 15 days, but bear in mind this may be a letter asking for further information such as a birth or adoption certificate.
Once a child turns 16, they can take control of their funds but they can only withdraw the money once they are 18. Parents are not able to withdraw funds at any point.
If your fund was claimed by your parents, once you turn 18 years old you should receive a letter addressed directly to you setting out your options.
Consider your choices
It is up to the account owner to give the existing provider an instruction on what they want to do with their CTF when they turn 18.
Any matured accounts can be transferred into either a mature CTF, cash ISA or stocks and shares ISA.
The first step is to seek help and talk through your options, particularly any tax implications if the money is removed from a mature CTF or tax wrapper like an ISA. Also find out what the annual charges and fees are if you leave it within a mature CTF.
Although parents can be a good guide, it is important for fund recipients to ask questions and make their own decision, suggests independent financial adviser Marcus Paine, managing director of Modern Money.
He says: ‘Young people should speak to somebody they trust, get some advice and do some kind of risk assessment. They could demand a meeting with the family financial adviser or they could find someone who is independent.
‘It is a gift and it is not going to come along again so they need to think carefully about it. There is not a right answer of what to do with this money but it is important to start to take responsibility for it.’
Short, medium and long-term options for Child Trust Funds
A good starting point is to consider whether you would like to use the money now – perhaps for university fees, a business project or travelling plans – or whether to invest it for the medium or long-term.
And if you want to use the money straight away don’t feel guilty about cashing it in and spending it, says Neil Lovatt, commercial director at Scottish Friendly. Putting the cash into a student account can also be a good move because they often offer enhanced interest rates.
Another option is to move the fund into a Junior Isa before you turn 18 or after this point it can be put into a cash, or stocks and shares ISA.
A cash ISA will be secure but have limited growth when interest rates are low, while an investment Isa can be an efficient way to grow your returns with the caveat that it can go down, as well as up.
‘A lot of Child Trust Funds are in index trackers or UK equity funds and these are quite a roller coaster,’ says Marcus. An Isa can be a good idea if you have no plans as it is a safer investment. For the medium-term of three to five years you can roll the money into an ISA.’
And if your longer-term goals are to buy a property then the Lifetime Isa scheme is a great way to receive a 25 per cent bonus each year.
‘You can invest an maximum of £4,000 a year and in return the government tops up your fund with £1,000 a year, until the age of 50.
The money is locked in however and can only be used you buy your first home or withdrawn over the age of 60 as a retirement fund.
How will you spend your Child Trust Fund nest-egg? We ask two teens about to receive theirs:
Film student Ben Plimley, from East Finchley, is planning to use the money from his trust fund to pay for future creative projects.
He only recently realised he had a trust fund and was surprised to hear he might have access to more than £500 when he turns 18 in November.
‘Since no one has received them before, I didn’t know they existed. The first time I heard about the funds was a news article a few months ago.’
Ben was born in 2002 meaning he was eligible for an initial payment of at least £250. He is also fortunate to have turned seven between September 1, 2009 and July 31, 2010, meaning he is one of the few children whose funds were topped up with an additional £250, before the bonus scheme was scrapped.
The 17-year-old hopes he will have enough cash to help fund film production or camera equipment.
‘Having a bit of extra cash means we can do projects outside of college. It is all zero-budget stuff we are doing so being able to leverage our own funds is a really exciting prospect.’
Ben currently makes short films and dramas with his film school friends and is eventually hoping to work in the film industry.
‘To say I have taken my own resources and made something with them is a good thing to show employers,’ he adds.
When Rosie Jacobs turns 18 in February next year she can access her Child Trust Fund. She planned to use the money to go interrailing after finishing her A-levels but says the pandemic has thrown everything up in the air.
‘It’s tricky with coronavirus affecting things. I am not sure if interrailing is going to be possible next summer,’ she explains. ‘I am now thinking of deferring going to university for a year so I might do Camp America or a longer trip of interrailing if I can.’
The London student says she has not seen her fund statements but is hoping the money will mitigate lost earnings.
‘I have not been able to work for six months so this fund will be really useful. I don’t know how much is in there – it’s going to be a surprise. It could be £500 or loads of money. I think my parents and grandparents have been paying into it.’
If her travelling is put on hold then Rosie plans to continue saving the fund and use it as a down payment on a house in the future. ‘I could add to it with my own savings and in the future be in a better position to buy a property.’
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