Child Trust Funds (CTFs) are a defunct tax-free savings product, but the six million children with money in one can now convert these accounts into the newer, more competitive Junior ISAs.
All babies born between September 2002 and 2 January 2011 got £500 or more free from the Government to save in a CTF and up to £4,080 a year can still be added tax free. This guide takes you through the CTF rules, what the best payers are, plus whether you should switch to a Junior ISA.
In this guide
What is a Child Trust Fund?
Child Trust Funds (CTFs) are savings accounts that were available for kids born between 1 September 2002 and 2 January 2011, which they could use to deposit free cash vouchers of up to £250 (up to £500 if you were on a low income) that used to be handed out twice to each child by the Government.
If CTF holders, or their parents/grandparents/friends, choose to, they can also add up to £4,080 a year into the accounts and earn interest tax-free - though there are reasons why you may not want to do this (see below). The allowance year runs from your child's birthday to their next birthday.
Child Trust Funds are no longer available to newborn children, having been replaced by Junior ISAs in 2011. But anyone who still holds a CTF is able to keep paying in and switch to a new top rate at any time, just like normal savings, so find the best place to stash the cash.
According to HM Revenue & Customs (HMRC), there are over 700,000 dormant CTFs. Find out where your child's fund is here.
Once put into a Child Trust Fund, money is locked away until the child's 18th birthday, when they'll get a lump sum that can be spent how they wish.
The choice and ongoing control of the investment belongs with the person who has parental responsibility and opens the account, and passes to the child at the age of 16.
Can I add cash to the Government's CTF contribution?
Yes. The Government's money was intended as just a bonus; the real aim behind CTFs was to encourage parents to save for their child's future, especially their university education. Parents, family and friends or anyone else can add a total of up to £4,080 a 'year' to the Government contribution, with the year starting on the child's birthday.
All savings put into CTFs are free from both income and capital gains tax, and the Government has confirmed there are no plans to change this, even though the spotlight has moved on to Junior ISAs. Technically, inheritance tax rules apply. However, unless it's a large gift from grandparents, this is likely to be irrelevant (read the Inheritance Tax guide for more details).
Is it worth adding your own money?
On the surface this is a tax-efficient scheme, so it's a good idea. Yet it has two major drawbacks.
The money goes direct to your child
Babes in arms can grow to be rebellious 18 year olds. So you have to be aware that the money goes straight to them. This means your savings for their college fund may be spent in a day on a Playstation, world trip or some darker purpose. It's their money, you can't stop them. So do consider whether you want your child at 18 to have complete autonomy over what they spend it on.
This is political
When this guide was first written, we said...
This scheme comes from a political agenda and opinions change. It's unlikely any party would be brave enough to reclaim the cash given by Government, but the rules and regulations could morph over 18 years.
The end of the free cash payments and abandonment of CTFs in favour of Junior ISAs has borne this out, and while there are no plans to remove the tax-free benefit from CTFs, this doesn't mean it won't happen in the future.
The CTF is a useful place to stash some cash, but it's probably best not to dunk it all in there.
Can the money be withdrawn?
No. It stays in the account until your son or daughter reaches 18. The only exception is an unpleasant thought. If a child dies before 18, the money automatically goes to the parents or guardian. There's also a provision to release the money early for terminally ill children.
Choosing the right Child Trust Fund type
Although you can no longer open a new child trust fund, you can still transfer an existing CTF to another CTF provider (or to a Junior ISA provider). When deciding what to do, you have two avenues of possibility:
Use a simple savings CTF and it works exactly like a normal savings account. You're guaranteed to get back the money that you put in, plus interest on top. For info on how interest rates work, read the full Interest Rates guide.
Investing means risking money in a stock market-linked product in the hope of better returns, with the chance you won't get back what you started with, as investment values can go down as well as up.
By plumping for either a 'stakeholder' or 'shares' type CTF, you're taking a risk of possibly losing the free cash.
This means the main question to ask yourself is...
Do you want to save or to invest for your child's future?
You can only choose one type of CTF. Conventional wisdom says that over most 18 year periods stock markets outperform savings, as there's time for market fluctuations to cancel each other out. Yet it's not risk-free; ask anyone who suffered poorly-performing pension or endowment funds!
There is no right answer. The choice is down to your priorities; are you willing to risk this money shrinking in order to chance it growing more quickly? If you didn't choose by the time your voucher expired, the Government opened a shares account for it, but you can transfer out. If you're unsure where your child's trust fund is, HMRC have created a register.
The Top CTF Savings Accounts
If you've decided to plump for a savings-type account, the choice of which one is simply a case of ‘who pays the most?'.
Only a limited amount of providers offer CTFs, as many consider them big work for little reward. The top picks tend to be smaller building societies; as such it's always worth checking your local ones for higher-paying 'branch only' offers.
Neither of the providers listed below will allow you to open a new CTF. Instead, you must transfer existing funds in a savings or investment type CTF into it.
Top interest payer, but rate includes a short-term bonus
Yorkshire BS - 3% AER
The top-paying child trust fund cash account is from Yorkshire Building Society. It pays 3% AER, but 0.7% of that is a bonus, lasting for 12 months from opening the account.
- This account has a short-term bonus - you may want to switch when the rate drops.
- You need to have at least £50 to open the account.
- Withdrawals are only allowed when the child turns 18.
- You can only apply for the account in a branch (find your nearest).
Top clean rate child trust fund account
Skipton BS - 2.65% AER
If you're wary of bonus accounts, Skipton offers a child trust fund account paying 2.65% AER (variable). However, it's still worth checking the rate regularly, as it's not guaranteed to stay the same.
- You can open this account with a starting balance of £10.
- You can for this apply by post or in a Skipton branch.
- Withdrawals are not allowed until the child turns 18.
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If you're happy with the element of risk, there's a further choice to make when it comes to investment-type CTFs. They come in two broad flavours:
These have strict operational limits, including a maximum charge it can lop off your investment each year of 1.5%. The good news though is that you can't be charged a penalty for transferring the investment.
These are more flexible plans that allow for a wider choice of investments. However on the flip side, the charges can be higher and less transparent than their stakeholder cousins.
Now, let us be straight here; investments aren't this site's expertise. We write about ‘the best way to buy investments', but not about ‘what to invest in'.
One option is to seek the help of an independent financial adviser, though this will cost anything from £75 - £250 per hour, so you need to be sure it's worth it. We've a guide to finding IFAs, picking the right one and what you may need help for.
Do remember though, IFAs are only guessing too; by the nature of investment they can and do get it wrong. This is an attempt to predict the future so there's no guarantee their guess will be any better than your own.
If you can, examine the investment options yourself, making sure the charges aren't too high. Different funds have different levels of risks. After all, putting your cash in a fund tracking a wide range of large UK companies is likely to be less risky than one specialising in Indian small tech companies.
Switch between savings & investment CTFs?
You can transfer your account both to another provider and to another investment type, eg, you can move from savings to stakeholder. There are no transfer penalties for doing so, though shares type providers may charge dealing costs and stamp duty when you close them.
To transfer simply sign up with the new provider; it'll inform the old one for you. Ask the new provider to move the money for you and inform the old provider it is being moved. You can't split the CTF if you transfer it though – you must transfer it whole.