Last month, the first children to benefit from Child Trust Funds were able to access them. So, what are they and if your child or grandchild has one, what are the options? Adrian Moy, Independent Financial Adviser at Pembroke Financial Services, explores how they can be used.
Child Trust Funds were introduced in April 2005 by the then Labour government. The government automatically opened a Child Trust Fund in the name of every child born between 1 September 2002 and 2 January 2011. They were introduced to encourage long-term saving for a child’s future and savings were tax-free.
To get savings started, the government made contributions at certain points depending on household income. All Child Trust Funds will contain at least £500 even if you’ve made no further contributions.
Adrian said: “The money held in these accounts is locked away until the child reaches 18. With the first children to have a Child Trust Fund now reaching 18, it’s important to think about what the options are. It’s estimated there are 6.3 million teenagers and children that will eventually be able to access money held in a Child Trust Fund.”
What should you do with a Child Trust Fund?
“If the child is still under 18, you may want to consider moving the savings into a Junior ISA (JISA). These replaced the now-defunct Child Trust Funds and offer a tax-free way to save and invest for their future. Many savers will find they can access better interest rates by transferring to a JISA,” Adrian commented.
“If the child has reached 18 or is nearing their 18th birthday, it’s worth considering how they want to use the money. Providers will automatically move money in a Child Trust Fund into an ISA, which is tax-free, or roll into another account with similar benefits. You essentially have three options when deciding what to do with the money.”
This option may seem attractive to teenagers receiving a lump sum of money that may be unexpected. In some cases, spending the money can be useful. For example, if it’ll help them pay for driving lessons or resources that are needed for university. However, there may be a temptation to spend with only a short-term view. If the money is going to be spent, it can be worth having a chat about how it’ll be used and whether it would improve their wellbeing and ensure they’re secure in the future.
Most Child Trust Funds will be transferred to a similar cash account when the child reaches 18. They may decide to leave it in a savings account for a rainy day. If this is what they choose, it’s well worth looking at best buy tables to find where they’ll secure the highest interest rates to help their money go further. The best interest rates tend to be with accounts with restrictions on when you can access the money.
Adrian added: “Keep in mind though that interest rates are at an all-time low. Finding an account that offers an interest rate that beats inflation is unlikely. As a result, the value of savings will decrease over time. In most cases, saving in a cash account should be reserved for an emergency fund and when they’re saving for a short-term goal.”
“Where teenagers plan to keep the money to one side for a long-term goal (at least five years away), investing the money may be appropriate. This can be done through a Stocks and Shares ISA account, meaning any investment returns will be tax-free,” Adrian said.
“You should keep in mind that the value of investments can fall. Short-term volatility is to be expected and is the reason investing shouldn’t be considered with a short-term goal. If, however, teenagers are saving intending to buy a house eventually, for instance, it can help savings keep up with and, hopefully, outpace inflation to deliver growth in real terms.”
Finding ‘lost’ Child Trust Funds
As you didn’t open a Child Trust Fund on behalf of your child and may not have continued to contribute to it, you may have ‘lost’ the account.
The government has set up a gateway for finding accounts if you don’t know who the provider is. An online form can be filled in here. If you’re a parent looking for your child’s trust find, you’ll need either the child’s unique reference number or their National Insurance number. You should receive the requested details within three weeks.
As your child or grandchild reaches adulthood, there are a lot of milestones approaching. The money held in a Child Trust Fund could help them purchase their first car, support them through further education or act as a deposit for a home in the future.
Now is a good time to think about whether you’d like to offer financial support as they become independent too. If you’d like to discuss if you can afford to help loved ones take steps towards milestones, from graduating to getting onto the property ladder, please get in touch. We’ll help you understand how it’ll impact your finances now and in the future.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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.