Fifteen years ago, Gordon Brown launched an initiative designed to give all children a financial boost. Parents of around six million British children were given a £250 voucher to open a Child Trust Fund on their child’s behalf, with many lower-income families receiving £500 to kick-start saving for their child.
Child Trust Funds mature on a child’s 18th birthday, and the first funds mature this autumn. If you have a child or grandchild that was born between September 2002 and January 2011 then they are set to receive a windfall over the next few months and years. Here’s what you need to know.
A £500 savings boost for children
Back in 2005, Gordon Brown launched a new savings scheme aimed at encouraging parents to save for their children. Child Trust Funds were designed to give all children some savings at the age of 18, to help with the costs of further education funding or, perhaps, as a contribution towards a deposit for their first home.
The government initially put £250 into the tax-free account during a child’s first year, then added another £250 when the child reached the age of seven. Lower-income families received £500.
The coalition government eventually ended the scheme in 2011, but not before around six million children had received the state payment.
In addition to the government contribution, parents, family and friends could also contribute to the account, up to set limits.
How to trace a lost Child Trust Fund
Where a parent or grandparent didn’t open a Child Trust Fund within a year of receiving the payment voucher, HM Revenue & Customs (HMRC) opened a stakeholder Child Trust Fund on the child’s behalf.
There are more than 1.8 million ‘Revenue-allocated’ accounts and, in addition, many hundreds of thousands of other accounts are classed as ‘addressee gone away’.
If you don’t know where your Child Trust Fund is held, HMRC have created an online tool to help young people and their parents/grandparents find out where their account is held.
Billions maturing over the next few years
According to analysis by Foresters Financial, around 800,000 teenagers will gain control of their Child Trust Fund every year until 2029.
The amount of windfall a child can expect will depend on where their Child Trust Fund was invested, and whether parents or grandparents made any additional contributions along the way.
While the Share Centre anticipate the average account value will be around £900, many children will benefit from a lump sum of significantly higher value.
The Guardian reports that a child who received the two £250 government contributions but whose parents have added £100 a month since birth and invested it in the FTSE 100, would have a windfall of £33,564 heading their way.
Even if the government contribution of £250 was invested in the FTSE 250 in 2002 on behalf of a child and never added to, that account would now be worth £1,235 according to analysis by Netwealth.
Parents who maximised their contributions each year would have contributed more than £55,000 — which, with investment growth, could now be worth as much as £70,000, according to Moore Kingston Smith, the accountancy firm.
What to do with a Child Trust Fund when it matures
Teenagers can take control of their account from the age of 16 but can only withdraw money from it from 18.
As we have seen, many Child Trust Funds will mature with a significant sum. Research from investment firm Unity Mutual shows that almost half of teens will be receiving more than £5,000, with 27% accessing upwards of £20,000.
As control of the account passes to your child or grandchild at age 18, it makes sense to have a conversation with them before the fund matures. If you have made additional contributions along the way, you may have an opinion on how the money should be used.
Including your child or grandchild in your financial planning discussions can also be beneficial, as it allows you to take an inter-generational approach to your wealth and estate planning.
There are three main options when a Child Trust Fund matures.
- Leave it
If the child does nothing, the Child Trust Fund provider will either transfer it to an ISA, if they offer one, or they will transfer it into a ‘protected account’, where it will remain tax-free.
- Cash it in
Once the child turns 18 years old, they can contact the Child Trust Fund provider and ask them to pay the money into their bank account. They will lose the tax benefits of a Child Trust Fund but their Personal Savings Allowance and Capital Gains Tax allowance ought to be enough to protect any gains from tax in the short term.
- Transfer it to an ISA
If the child is over the age of 16 and under the age of 18, they could consider transferring the money to a Junior ISA. Above 18, they would need to choose an adult ISA, including the Lifetime ISA.
While new rules mean any transfers won’t count towards the annual £20,000 limit in a Cash or Stocks and Shares ISA, transfers to a Lifetime ISA will count towards the £4,000 limit.
Get in touch
If your child or grandchild’s Child Trust Fund is maturing and you’d like advice on what to do next, please get in touch. Email firstname.lastname@example.org or call us on 01189 876655.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.