Child Trust Funds

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 £4,260 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.

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 £4,260 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Child Trust Funds are no longer available to newborn children, having been replaced by junior ISAs in 2011.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.

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.

According to HM Revenue & Customs (HMRC), there are over 700,000 dormant CTFs. Find out where your child's fund is.

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 £4,260 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).

...but it won't be worth it for most unless they pay more than normal kids savings

Children are taxed just like adults, and just like adults that means that if they’ve no income they can earn up to £17,850 a year from savings without paying tax on it (that's the £11,850 personal allowance + £5,000 starting savings allowance + the £1,000 personal savings allowance (PSA)).

Even in the unlikely event they have real income, the personal savings allowance, introduced in April 2016, allows them to earn up to £1,000 a year interest tax-free (unless they become higher rate taxpayers in which case… WOW!) 

So these days there are only three main reasons you’d put new money into a Child Trust Fund rather than the top children's savings accounts

1. You want to lock the cash away until they're 18. Child Trust Funds mandate this so it's an easy way to do it. Though as we explain below, you need to be prepared that this means on their 18th birthday, the money is theirs to do with as they please.

2. If you're a parent giving money that'll earn more than £100/yr interest. Child Trust Fund savings are tax-free and remain tax-free year after year.

Yet money given to a child by each parent or step-parent (not grandparents, aunts, uncles etc) which generates more than £100/year in interest in normal (non CTF) savings will be paid at the parent's tax rate.

So the £100 allowance is on a 'per parent' basis, rather than a 'per child' basis.  The aim's to stop parents using their kids' tax-free allowance for an extra allowance.

Once the child earns more than this, the whole lot is taxed at the parent's tax rate. Yet even then if the parent is within their personal savings allowance and the child's savings don't take them over, then it'd still be tax-free.

Yet if the child goes over the £100 limit and the parent is over the PSA then their savings would be taxable – in which case saving it in a Child Trust Fund would be a tax benefit, as then it’s tax-free. For a full explanation, read how kids' tax works.

3. If Child Trust Funds pay more than normal savings.  Even if there’s no tax advantage for your child, then if the rate is higher, as it can sometimes be, then you could save in a Child Trust Fund for them. So compare the CTF rates below to the top kids' savings rates. 

If the Child Trust Fund pays more, so you’re thinking of it, do remember the money is locked away until 18.  So if rates change and kids savings pay more later, you won’t be able to withdraw it and shift it there.

You won't have any control over the money

On the surface a CTF is a good way to save for your child's future. Yet it has two major drawbacks.

• The money goes direct to your child

  From the day the cash goes in a Child Trust Fund, it's the child's money, not the parents'. So you must remember at age 18, whatever you've planned for the money - such as building a mortgage deposit for them - the money's actually entirely your child's, and they can do WHATEVER they want with it.

  So while you may have a cute toddler now, they could grow up to be a rebellious 18-year-old. Even if that's just a phase, when the money in Child Trust Funds finally becomes accessible, on their 18th birthday, it becomes theirs to do as they will.

  To take it to its 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.

• 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:

• Savings-type CTFs

  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.

• Investment-type CTFs

  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

Only a limited number of providers offer CTFs, as many consider them big work for little reward. The top picks tend to be smaller building societies or credit unions; as such it's always worth checking your local ones for higher-paying 'branch only' offers.

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?'.

We've included an account below, in case you want to keep a CTF, but options are limited and rates are low, so consider whether you want to transfer to a junior ISA, which offer higher interest rates - up to 3.5%.

Investment CTFs

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:

• Stakeholder account

  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.

• Shares account

  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.