Child Trust Funds
Should you switch to a junior ISA?
Child Trust Funds (CTFs) are defunct tax-free savings products, but the six million original accounts can be converted into more competitive junior ISAs – and the first children eligible for the funds are now old enough to manage their account themselves.
All babies born between September 2002 and 2 January 2011 got £50-£1,000 free from the Government to save in a CTF and up to £4,368 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.
Warning: If your kid's aged 7-16, are you one of an estimated one million with a lost CTF? If you've any children who qualified for a CTF but don't know where their account is, there's a tool to track it down.
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 £4,368 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Child Trust Funds are no longer available to newborn children, having been replaced by junior ISAs in 2011.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 money belongs with the person who has parental responsibility until the child turns 16, when they can choose to manage their own account if they wish – and the first children with CTFs have just turned 16.
What if I don't know where my kid's Child Trust Fund is?
There are an estimated one million lost CTFs, according to charity the Share Foundation. Often this happens when a family moves home and forgets to update their CTF provider.
So if you've a child born between 1 September 2002 and 2 January 2011, check now if you've lost track of their CTF. HM Revenue & Customs (HMRC) has a handy tool where you can find out what provider the CTF is with. Here's a step-by-step of how to use it:
- Go to HMRC's tool. You'll need to log in using a 'Government Gateway ID' – you'll have one of these if, for example, you fill in a tax return or have renewed your driving licence online. If you don't have one, you can create one online.
- Fill in your details, including address and phone number.
- Fill in your child's details, including name and date of birth.
- You should hear from HMRC within 15 days – if it needs further information it'll contact you by phone or post. This'll tell you which provider holds your child's CTF.
- Contact your CTF provider and it can reunite you with your child's account.
If your child's already turned 16, they can track down their CTF themselves. They just need to follow the steps above.
Ever since the CTF was replaced by junior ISAs, it has been a defunct product. There's been less competition, less innovation and lower interest rates compared to the newer version (see CTF best buys below).
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 (£4,368 a year for 2019/20), 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.
However if you have an investment account (ie, your CTF is invested in stocks and shares), costs can vary from provider to provider. You need to look at two things:
- Whether the CTF account charges you fees to transfer out of it.
- 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.
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 make the transfer?
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.
Make sure the account you're applying for allows you to transfer funds from previous years - we note this in all accounts that feature in our Top Junior ISAs guide.
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 £4,368 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).
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 £18,500 a year from savings without paying tax on it (that's the £12,500 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. Also bear in mind you may be better off transferring your CTF to a junior ISA.
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 (or a junior ISA) 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 and top junior ISA 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.
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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:
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.
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.
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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 3.6%.
Skipton BS offers the only cash child trust fund account open to all, paying 2.5% AER variable. You can open it with £1 and it's worth checking the rate regularly in case it drops.
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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 in 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 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.
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