Top Child Trust Funds
How to maximise your interest
Child Trust Funds (CTFs) were offered to most children born between 2002 and 2011. They're now ‘dead’ accounts – as you can't open a new one – so there's little competition and interest rates can be low. If your CTF rate is uncompetitive, you can choose to switch it in to a junior ISA, its replacement account, which usually offer better rates. This guide takes you through the rules, plus whether you should transfer.
We've three guides on Child Trust Funds, so before you read on, check you're in the right place...
This guide shows how CTFs work and how to get the best rate...
Child Trust Fund need-to-knows
A few quick Child Trust Fund facts before we start...
1. Child Trust Funds (CTFs) are tax-free savings accounts
They were available for children born between 1 September 2002 and 2 January 2011. Children got free cash vouchers from the state of up to £250 (or £500 if you were on a low income) to be added to their Child Trust Fund. Though children born in the last six months of the scheme may have received as little as £50 from the state.
Child Trust Funds are no longer available to new account holders as they were replaced by junior ISAs for kids born on or after 3 January 2011. But anyone who still holds a CTF is able to keep paying in.
The initial state contribution was intended as just a bonus; the real aim behind CTFs was to encourage parents to save for their child's future. Parents, family, friends or anyone else can add a total of up to £9,000 a 'year' to the Government contribution (the contribution year starts on the child's birthday).
Any money saved is kept in trust for the child, only the child can access it when they turn 18 (unless the child dies or is terminally ill). The child can choose to manage the account from age 16 if they wish, and the cash is then theirs to do with as they like when they reach 18.
To take it to the extreme, here's a question Martin was asked: "Could I stop them if they wanted to buy drugs with it?" The answer is "no".
So if you're saving for a university fund, for example, (see our Don't Pay Tuition Fees Upfront guide) there's a risk with using a Child Trust Fund that you just don't have if you're using a normal savings account. Saving in your name (assuming the interest doesn't take you over your personal savings allowance) could be safer.
All savings put into CTFs are free from both income tax and capital gains tax. Technically, inheritance tax rules apply. However, unless it's a large gift from grandparents, this is less likely to be relevant (read the Inheritance Tax guide for more details).
Yet saving in a Child Trust Fund won't be worth it for most unless their rates pay more than normal children's savings. This is because children won't pay tax on savings in any type of account unless they earn more than £18,570 a year from it (or other sources).
The one exception is if a parent or step-parent gifts a child money that would then earn more than £100/year in interest in a normal savings account. In this case, the whole amount could be taxed at the parent's tax rate if they've exceeded their own tax-free personal savings allowance of up to £1,000.
In this case, saving in a Child Trust Fund (or a junior ISA) would be beneficial, as the interest is tax-free and will remain tax-free. For a full explanation, read how tax on children's savings works.
Top-paying Child Trust Funds
Actually, this section's a little mis-titled, as while there are a few Child Trust Funds paying okay interest rates, you'd actually get the top savings rate by transferring to a Junior ISA.
For example, the top junior ISA rate is currently 4%, while One Family's CTF pays just 1.3%, Nationwide's CTF pays 3% and Yorkshire Building Society's CTF pays 3.05% – though always check what yours is paying before transferring.
If you can boost the rate by switching to a junior ISA, the good news is the transfer is easy. Just note that this is a permanent decision as you can't switch back.
They're very similar accounts – you can add exactly the same amount of savings in each one (£9,000 a year for 2022/23), and you can choose between cash and investment versions of both accounts. Both options also keep the cash locked away until your child turns 18.
Should I pick a cash junior ISA or a stocks & shares junior ISA?
There's no easy way to decide, and no right or wrong answer, it's all about your attitude to risk – and also how old your child is.
The younger they are, the more likely investing will beat cash savings, as over longer periods the stock market tends to outperform cash. Yet there's no guarantee. If your child is close to 18, you're more at risk of the up and downs of the stock market if they plan to withdraw it straight away, as they could incur a big loss if investments have tanked.
Do check whether you have a cash Child Trust Fund or an investment Child Trust Fund. You can still transfer it whatever the answer is, but if one sort has been working for you, then you may want to transfer it in to the same sort of junior ISA.
How to transfer a Child Trust Fund to a junior ISA
If you've decided that you want to transfer into the junior ISA scheme, here's step-by-step help.
- Find a junior ISA that accepts transfer in from CTFs. Our top junior ISAs guide lists all the current top payers for cash accounts, and highlights which allow transfers in from Child Trust Funds (not all do).
Looking to invest? It's important to note MoneySavingExpert.com doesn't cover where you should place your investments – it's not our field of expertise. Instead, if you're thinking of investing (or continuing to invest), these Hargreaves Lansdown and Beanstalk guides may be useful, or try comparison site MoneySupermarket for a list of providers.
Always check out the fees involved to make the transfer as some CTF providers may charge you to transfer out. And check the new provider's management and activity fees to see if they're more than what you're currently paying.
- Open a new account and request the switch. Apply for the new junior ISA. Don’t worry, you don’t need to add any money in to it, you can just open one to accept the transfer.
And you don't need move the money across yourself. Within the application form, the new provider will have of how to request the transfer. This will be the case whether you're going for a cash or stocks & shares junior ISA.
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