The 1st September 2020 marked the beginning of the Child Trust Fund windfalls.
What is a Child Trust Fund?
The Child Trust Fund (CTF) was the predecessor of the Junior ISA. It was introduced in 2005 to encourage saving for children. All children born between 1 September 2002 and 2 January 2011 received a Government voucher of between £50 and £250 – with extra government contributions for children from lower income families. Some children also received a second voucher when they reached the age of seven, but this was scrapped after a change in Government, so not all children benefited. This money was to be invested until the child’s 18th birthday.
Kirsty Stone, Chartered Financial Planner at IFA The Private Office says “Once a child reaches 18 and their CTF comes to fruition, the good news is that they can roll it over into an adult ISA if they want to keep the money in a tax free environment. This could be particularly important if they are looking to keep the money invested for the longer term, as under current legislation there is no Capital Gains Tax to pay on the funds held inside an ISA or income tax when the ISA is drawn upon.”
If they are looking to keep the money in cash, the benefit of keeping it in a cash ISA will depend on a number of things, especially how much is maturing. This is because at the moment cash ISA rates tend to pay less than the standard equivalent accounts, and the Personal Savings Allowance is in place, which means that a basic rate taxpayer will pay no tax on interest earned of up to £1,000 per year, perhaps even more if they also qualify for the starting rate band for savings.
Stone adds “This begs the question as to whether the CTF should instead be invested for longer term growth, which can be achieved by transferring the CTF to a Stocks and Shares ISA. The key question is what the CTF is going to be used for – many 18 year olds may view this as help towards a property purchase, in which case they may not be looking to use the capital until their late 20s, giving up to 10 years of potential investment growth, albeit with the associated risk, as the value can fall as well as rise.”
In addition, they could also put some, or all, of the proceeds from the maturing CTF into a Lifetime ISA. The current allowance for this is £4,000 a year, which could see them earning a government bonus of 25% (up to £1,000 each year) on each deposit made – in addition to any interest or growth on the account. But there are strict rules on what the funds can be used for – fall foul of the rules and the bonus will be clawed back. From next year a penalty in addition to the clawing back of the bonus will be applied, so it’s important to understand the restrictions and how they may impact the future plans of your child.
What happens when you reach 18?
Changes in regulation made earlier this year mean that on maturity, even if no instruction has been given, the maturing CTF will be moved into a ‘matured CTF account’ or an adult cash ISA or stocks and shares ISA with the CTF provider - without it counting towards the saver’s annual ISA allowance for that year.
The Regulations provide that funds in either ‘protected account’ will keep their tax advantaged status, and the general terms and conditions which applied before maturity.
However, although this means that your CTF will keep its tax advantaged status, it makes sense to review the account to make sure that you are getting the most out of it.
For example, if you have a cash CTF with Skipton Building Society, which is currently paying 2% AER, on maturity it rolls into the maturing CTF account paying 0.25% AER. If you were to leave it here, you would earn just £125 per year on a deposit of £50,000. However, there are far better rates to be found elsewhere. The best easy access cash ISA is with Coventry Building Society (Triple Access ISA (Online)) and is paying 0.96% AER currently. On £50,000, rather than £125 a year, you could earn £480.
How do I find a lost CTF?
Huge numbers of Child Trust Funds have been lost. The Share Foundation estimate that two million Child Trust Fund accounts are lost to the young people they were set up for. This can be because HMRC set up the account on their behalf (if the parents did not open one) or because it has been forgotten and the parents have not updated their address.
However, lost accounts can easily be located. You can find out where a lost Child Trust Fund is, even if you don’t know the provider.
Go to the GOV.uk website and fill in the HM Revenue and Customs (HMRC) form. This tells HMRC to check where the account was originally opened. You’ll need a Government Gateway user ID and password. If you don’t have a user ID, you can create one when you fill in the online form.
HMRC will send you details of the Child Trust Fund provider by post within three weeks of receiving your request.
If you are turning 18 or have a child or grandchild who needs help with their maturing cash CTF, please contact us. If you need help with a stocks and shares CTF, whilst we at Savings Champion don’t offer advice on this directly, we can help you find someone who can. Call us on 0333 323 9065.
The value of your investment can fall as well as rise and is not guaranteed.