Child Trust Funds (CTFs) are a now defunct tax free savings product, but over six million children are still locked into these accounts. The silver lining is you can at least transfer them to up to 3% interest.
All babies born between Sept 2002 and 2 Jan 2011 got £50 to £500 free from the government to save in a Child Trust Fund (CTF) and up to £4,000 a tax year can still be added tax free. For children older or younger, CTFs have now been replaced by Junior ISAs.
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 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 £4,000 a year 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They are no longer available to new-born children, having been replaced by Junior ISAs in 2011. 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.
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 at the age of 16.
You can save up to £4,000 per year in a CTF
The allowance runs from birthday to birthday, though it will rise with inflation each year, as with the junior ISA.
As the limit increased from £3,840 to £4,000 on 1 July 2014, if you'd already used your allowance for the 2014/15 tax year, you can now top up your contribution to hit the £4,000 allowance.
Child Trust Funds can be converted to junior ISAs from April 2015
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.
The Government's announced that from April 2015, people whose kids have a CTF account will be able to transfer it to a junior ISA. Full details in CTFs to J-ISAs.
In the meantime, you can still shift CTFs around different providers to try to get a better rate. But the announcement will also mean that CTF providers may stop bothering about these accounts, and interest could plummet.
At the moment, the difference between the best buy product for each is just 0.25% AER, but we could see this gap widen as the April 2015 transfer day gets closer.
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 £4,000 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.
Babies 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.
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 stock market-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 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 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.
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: Branch or post.
- Safety: Shared £85,000 UK protection (see Safe Savings)
The top paying Child Trust Fund 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. At that point, see if you can get a better account.
You can apply and operate the account in branches (find your nearest) or by post.
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.
You can for this apply by post or in branches, provided you have at least £10 to pay in.
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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 Adviser'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.