All babies born between 1 September 2002 and 2 January 2011 got from £50 to £500 free from the government to save in a Child Trust Fund (CTF). This Q&A guide to CTFs includes the current best buys.
From 3 January 2011 these payments stopped and anyone born after that, or before Sept 2002, can save tax-free in a Junior ISA, while the amount CTF holders can stash tax-free has also been upped to £3,720/year.
In this guide
What is a Child Trust Fund?
Child Trust Fund's (CTFs) were savings accounts available for kids born between 1 September 2002 and 2 January 2011, which they could use to deposit the free cash vouchers of up to £250 that used to be given out by the government.
If CTF holders, or their parents/grandparents/friends, choose to, they can also add up to £3,720 per year (upped from £3,600 on 6 April 2013) into the accounts and earn interest tax-free - though there are reasons why you may not want to do this (see below)
They are no longer available to new-born children, having been replaced by Junior ISAs in 2011. However, 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.
Once put into a CTF, money is locked away until the holder'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 CTF account, and passes to the child itself at the age of 16.
What's changing with Child Trust Funds?
If you have a Child Trust Fund open in your son or daughter's name, you've probably heard the fuss about Junior ISAs and wonder where you stand. Here's a quick rundown…
- You CAN'T shift a Child Trust Fund into a junior ISA.
The Government's decided to keep the products separate, which means transfers from old CTFs to shiny new junior ISAs aren't possible.
You can still shift CTFs around different providers to try to get a better rate, but one worry is banks may stop bothering about these accounts, and interest could plummet.
- But government are in talks to merge CTFs and junior ISAs
Following the March 2013 Budget, the government is now consulting on whether CTFs should be more closely-aligned to junior ISAs - mega low rates for CTF customers are said to be a key factor. But it's only a consultation at the moment - no decisions have been made so the info in this guide still applies. See the Government mulls merging Child Trust Funds with junior ISAs news story.
- The CTF allowance has also been boosted to £3,720 per year.
This is good news, as it means the amount you can choose to save tax-free in your kid's name has trebled over recent years. The £3,720 limit took effect from 6 April 2013, and as CTF years run from birthday to birthday (and not in line with tax years), you have from now until your child's next birthday to top it up to this new maximum - if you want to.
After that, the new £3,720/year allowance will run from birthday to birthday, each year, though it will rise with inflation each year, as with the junior ISA.
- If you have a voucher for free cash, you can still use it.
The government cash given with CTFs came as a voucher to deposit in an account of your choice, and expired after a year - one at the baby's birth, and one on their 7th birthday. The last few are now approaching that deadline (expiry date is printed on the voucher), so act quick to make a choice - at the very least put the voucher in the best savings-type account so you're earning interest and can switch when you make a decision later.
If you don't use the voucher before it expires, HM revenue and Customs will pick an account for you. It's not likely to be a great account, so check it out, and switch it to a better one, if necessary, if that happens. Full info in MSE News: Child Trust Fund warning.
Can I add to the Government's 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 childrens' future, especially their university education. Parents, family and friends or anyone else can add a total of up to £3,720 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 that there are no plans to change this, even though the spotlight has moved on to Junior ISAs
Technically, Inheritance Tax rules do apply. However, unless it's large gifts 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. The CTF goes straight to them. Your savings for their college fund may be spent in a day on a Playstation, world trip or some darker purpose. It is their money, you can't stop them. Do consider whether you want your child at 18 to have complete autonomy over all this.
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, but the rules and regulations could morph over 18 years."
The end of the free cash payments and abandoment 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.
Banks may stop supporting CTFs
Now that these accounts are off the political agenda, it's very possible that banks and building societies will follow suit, ditching good rates and focusing on junior ISA rates instead. As you can't move money in CTFs into a different type of product, your money would be trapped earning rubbish interest.
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 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. Provisions are also possible to release the money early for terminally ill children.
Choosing the right CTF type
When deciding what to do with that CTF voucher, you have two avenues of possibility:
Use a simple savings child trust fund 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 stockmarket-linked product in the hope of better returns, with the chance you won't get back what you started with.
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 stockmarkets outperform savings, as there's time for market fluctuations to cancel each other out. Yet it's not risk-free; ask anyone who suffered awful-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 don't choose by the time your voucher expires, the Government will open a shares account for it, but you can transfer out of it.
The Top CTF Savings Accounts
Once 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.
Furness BS, 3.05% AERHighest rate, no short-term bonus
- Rate: 3.05% AER variable
- Min deposit: £500
- Interest paid: Annually, on the child's birthday.
- Access: Phone or branch.
- Safety: Full £85,000 UK protection (see Safe Savings)
The highest-paying account is from Furness Building Society, which pays a 'clean' rate of 3.05% AER - ie, there's no bonus which drops after an intro period. If you don't want to worry about ditching and switching (though you should still check your rate regularly), this is a good bet.
Yorkshire BS, 3% AERGood rate, inc. year-long bonus of 0.7%
- Rate: 3% AER variable inc 0.7% bonus for 12 months
- Min deposit: £50
- Interest paid: Annually, day before child's birthday.
- Access: Phone or branch.
- Safety: Shared £85,000 UK protection (see Safe Savings)
The next best account is from Yorkshire Building Society, paying 3% AER, with 0.7% of that being a bonus that lasts for 12 months.
You can apply in branch or by phone (call 0845 1200 100), then the account must be operated by in branches (find your nearest).
Watch out for when the short-term bonus ends - mark it in your diary then ditch & switch at that point (use the Tart Alert to help).
Skipton BS, 2.65% AER 'Clean' rate ie, no short-term bonus
- Rate: 2.65% AER variable
- Min deposit: £10
- Interest paid: Annually, day before child's birthday
- Access: Branch or post.
- Safety: Full £85,000 UK protection. See Safe Savings
The Child Trust Fund from Skipton pays 2.65% AER and is also totally 'clean' ie. there's no bonus which drops after an intro period. Still check your rate regularly, but this is a decent bet.
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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 into 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 an Independent Financial Advisor's help, though this will cost (c. £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 (read Financial Advice guide).
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. No one knows the ‘right answer'.
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 (meaning not as high possible growth, not as high possible loss) than one specialising in Indian small technology companies.
Switch between savings & investment CTFs?
You can transfer your account both to another provider and to another investment type, e.g. you can move from savings to stakeholder. There will be 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.