Child Trust Funds
Should you transfer to a junior ISA?
Child Trust Funds (CTFs) were offered between 2002 and 2011. If your child has got one, you can now add up to £9,000 a year to it, or you can convert it into a junior ISA (JISA). This guide takes you through the rules, how to find lost accounts, plus whether you should transfer into a JISA.
This guide's for those looking after after a younger child's CTF. If you've just turned 18 (or your child's just turned 18), see our What to do with a maturing CTF blog.
What is a Child Trust Fund?
Child Trust Funds (CTFs) are tax-free savings accounts that were available for kids born between 1 September 2002 and 2 January 2011. Kids got free cash vouchers of up to £250 (or £500 if you were on a low income) from the state to be added to their Child Trust Fund.
Child Trust Funds are no longer available to new account holders as they were replaced by junior ISAs in 2011. But anyone who still holds a CTF is able to keep paying in and can switch to a new top rate at any time, just like normal savings.
The six Child Trust Fund need-to-knows
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).
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).
Saving in a Child Trust Fund won't be worth it for most unless their rates pay more than normal kids' savings – and at the moment, they don't.
The reason we say this is that children are taxed just like adults, and just like adults that means that if they've no income they can earn up to £18,500 a year from savings without paying tax on it (that's the £12,500 personal income tax allowance + £5,000 starting savings allowance + the £1,000 personal savings allowance).
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 in savings interest tax-free (unless they become higher-rate taxpayers, in which case… WOW!)
Is there any other way a CTF provides tax benefits?
Yes, if you're a parent giving money that'll earn more than £100/year in interest.
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-Child Trust Fund or junior ISA) 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 as an extra allowance for them.
Once the child earns more than the £100 a year in interest, 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 doesn't take them over it, it'd still be tax-free.
But if the child goes over the £100 limit and the parent is over their personal savings allowance, then the child's savings would be taxable.
The choice of account and control of that account belongs to a parent or guardian until the child turns 16, when they can choose to manage their own account if they wish. So, the oldest children with Child Trust Funds can now manage their own account.
But even if you still have control of the account, it's important to know that from the day the cash goes in a Child Trust Fund, it's the child's money, not yours.
And 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.
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.
Can the money ever be withdrawn before my child turns 18?
Yes – but the only exceptions are unpleasant thoughts. If a child dies before 18, the money automatically goes to their parents or guardian. There's also a provision to release the money early for terminally-ill children.
There are an estimated one million lost Child Trust Funds, according to charity the Share Foundation. Often this happens when a family moves home and forgets to update their CTF provider with their new address.
Fortunately, HM Revenue & Customs (HMRC) has a handy tool where you can find out which provider your CTF is with. The tool can be used by parents and teens. Here's a step-by-step guide:
- Go to HMRC's tool. You'll need to log in using a 'Government Gateway ID'. If you don't have one, it's no biggie – you can create one easily.
- Fill in your (or your child's) details, including name, address, date of birth, phone number and National Insurance number.
- You should hear from HMRC within three weeks telling you which provider holds the account – if it needs further information, it'll contact you by phone or post.
- Contact the CTF provider and it can reunite you with the account.
If you're 16 or older, you can do this for yourself (you can find your CTF before 18, you just won't be able to access the cash). If you're a parent with children younger than 16, you can find out where the CTF is held on their behalf.
You'll need their Unique Reference Number (check for it on any old paperwork related to Child Trust Funds) or their National Insurance number – if you don't have these details, you'll need to apply by post.
Ever since the CTF was replaced by junior ISAs, there's been less competition and lower interest rates compared to the newer version.
After much lobbying, the Government finally agreed to allow CTFs to be converted into junior ISAs from 6 April 2015.
On the surface, they're very similar accounts – you can add exactly the same amount of savings in each one (£9,000 a year for 2020/21), 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.
Just because I can transfer, is it worth doing?
Yes, absolutely – if it's a cash account – quite simply because the top junior ISAs pay more than the top Child Trust Funds and there's more product choice.
But this is a permanent decision. You need to be sure that you want to transfer into the junior ISA scheme, as you can't switch back.
How do I actually transfer a Child Trust Fund to a junior ISA?
If you've decided that you want to transfer into the junior ISA scheme, you first need to check that the junior ISA provider you're interested in accepts transfers. Most do, but it's worth checking at the outset.
If it does, you need to contact the provider and request to switch your CTF to a junior ISA with it (see our Junior ISA guide for the best buys).
As part of the application you'll need to fill out a transfer form with the details of your CTF, but your provider will deal with the hassle of transferring your funds over. This will be the case whether you're going for a cash or stocks & shares junior ISA.
What if I'm transferring from or to an investment CTF/JISA?
If you have an investment account (ie, your CTF is invested), costs to transfer can vary from provider to provider.
You need to look at whether the CTF account charges you fees to transfer out of it, and also at the management and activity fees associated with the investment JISAs you're interested in, and whether they're more than what you're currently paying.
Fees tend to be lower for junior ISAs than for CTFs, but it's worth checking specifically, especially if you're a very active investor.
Although you can no longer open a new Child Trust Fund, you can still transfer an existing CTF to another 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. Your child is guaranteed to get back the money that you or they 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 has created a register.
How do I actually do the transfer?
There aren't many Child Trust Fund products around to transfer in to (we only list one cash CTF below, for example), but if you're in a low interest Child Trust Fund and you want to transfer in to a new one, or you want to switch from a cash Child Trust Fund to an investment version or vice-versa, you still can.
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.
Are there any fees to transfer a Child Trust Fund?
There aren't usually any fees associated with moving from a cash Child Trust Fund to an investment version.
If you're moving the other way, check if there are any dealing costs or stamp duty charges to sell your investments to make the transfer.
How do I go about choosing an investment CTF?
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 (1.5%). The good news 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's 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 between £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.
But remember, 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 risk. 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.
Top Child Trust Fund for switching
When it comes to Child Trust Funds these days, options are limited and rates are low. If you've already got one and want to keep it, check the rate you're getting against the account below to see if you could earn more by switching. We've only been able to find one Child Trust Fund account that can be opened by all - from Skipton Building Society.
We've listed details of that account below, though it's worth repeating again – you can get a much better rate (up to 2.95%) by transferring to a junior ISA instead.
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