What is a Child Trust Fund (CTF)?
CTFs were introduced in April 2005 to help parents give their child a financial head-start in life. They are tax-free savings accounts that were available for children born between 1 September 2002 and 2 January 2011, with the Government issuing £250 vouchers at birth and a further £250 top-up voucher at age 7, up until these were abolished in 2010.Additional contributions could be made by parents, family members or friends up to the relevant annual subscription limit. There were three types of CTF available (Cash, Shares and Stakeholder), each with various rules and implications for the saver.The first CTFs will have matured in September 2020 when those children born in September 2002 turned 18.
In a bid to simplify the system, in 2011 CTFs were replaced by Junior ISAs (JISAs). These were designed to be more straightforward, with just two kinds available – Cash or Stocks & Shares.
Both types of JISA belong to the child, and the funds can be accessed by them at age 18, but not before. See our JISA blog Saving for future generations with a ‘Junior Individual Savings Account’ (JISA) for more information.
Existing CTFs can still receive subscriptions of up to £9,000 per year (same as the annual JISA limit) and CTFs can also be transferred to a JISA, which expands the list of potential providers.
Maturing CTFs - what to do with the proceeds?
When the child turns 18, they need to decide what happens to the funds in their CTF. The provider will write to the child, and they need to tell the provider what they want to do.
If the child doesn’t want or need access to the money straight away, there are several investment options to consider:
Roll over into an adult cash or stocks and shares ISA
By default, and in the absence of any other instruction, a CTF will be converted into an adult (‘matured CTF’) ISA with the existing provider. The funds will be invested as they were before, either as cash or stocks & shares. The only exception is where the existing provider is not authorised to offer ISAs, in which case the CTF funds may be transferred elsewhere. Remember that a stocks and shares ISA carries investment risk, and that returns are not guaranteed.
Invest the funds into a Lifetime ISA
A Lifetime ISA provides savers with a 25% bonus on up to £4,000 saved per year until age 50: a maximum bonus of £1,000 per year. You need to be between ages 18 and 39 to open a Lifetime ISA and to qualify and keep the bonus the funds must be used towards buying a first home. If a decision is made later to use the money for anything else, then any bonuses given will be clawed back via a withdrawal charge. This charge is currently 20%, rising to 25% from 6 April 2021.
Transfer the funds into a deposit account
The funds could be held in a deposit account, designed to earn some interest each year. While this is a fairly low risk option, many deposit accounts currently pay interest which is less than the rate of inflation.
If you would like more information on what to do if you have a maturing Child Trust Fund, Contact us.
The above information is for educational purposes only and is not a personal recommendation or investment advice. If you are unsure about the suitability of a particular investment, you should speak to an authorised financial adviser. As you probably know, the value of investments and the income from them can go down as well as up, so you might not get back the amount you invest.
We’ve made every effort to ensure the information above is accurate. Content is based on our understanding of current law and practice at the time of writing, which could alter as a result of future legislation. ISA limits are subject to change and the favourable tax treatment given to ISAs may not be maintained in the future. Tax treatment may depend on your individual circumstances. This article is aimed at UK residents.
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