Child trust funds explained What are child trust funds?

child trust funds explained

Finding an account with a competitive rate will see your child given the best start in their adult life

Forthcoming changes to child trust funds from April 2015

The rules governing child trust funds are changing: from April 2015 it will be possible to transfer your child trust fund into a Junior Isa – click here to see the best rates on Junior Isas.

Changes to child trust funds from January 2011

Child trust funds (CTFs) were introduced in April 2005 to encourage long-term saving and give all children a financial asset when they reach 18. 

However, it was announced in May 2010 that child trust funds would be phased out from the following August. From the beginning of that month, the government's contribution to new child trust funds decreased from a minimum of £250 per child to £50 per child. Top-up contributions to child trust funds, which the government had paid when all youngsters reached their seventh birthdays, were also scrapped. 

From 1 January 2011, all government contributions to child trust funds have been stopped, and babies born on or after this date will be ineligible to open child trust funds. 

Parents with children who already hold child trust fund accounts will still be able to contribute money to these (up to the maximum annual limit), and it will still be possible to shift your child's funds from one CTF account to another should you wish to do so.  

There are other ways you can start putting money aside for your child if you are unable to contribute to a child trust fund. Read the article Seven smart ways to save for children for top tips and advice on getting started. 

A new kind of Individual Savings Account (Isa), the Junior Isa, was launched in November 2011. These are tax-free savings vehicles similar to child trust funds, but there are no government contributions to the accounts.

Different types of child trust fund accounts

There are three main types of child trust fund account to choose from, offered by a range of providers including banks, building societies and friendly societies. Within these three categories are numerous financial products including straightforward cash-based savings accounts, or share-based accounts for those who fancy a flutter on the stock market. 

Topping up a child trust fund account

Once you've opened a CTF account, you can add your own money and friends and family can contribute too. The maximum you can pay in is currently £3,720 a year.

Government contributions and interest don't count towards this limit, however. The start date for each year is your child's birthday, except in the first year, when it will start from the date the account is opened.

Taking money out

Only your child will be able to access the money and, once you've made a contribution, you can't take it out. But your child won't be able to withdraw the money until they are 18. At this point, they can choose what they want to do with the money – spend it or invest it further.

Tip If you choose a child trust fund savings account, keep an eye on the Which? Best Rate child trust funds and switch if necessary so you've always got the best deal. You can even swap from a savings account to a share-based one or vice versa.

If you want a share-based account, look carefully at the charges. Most stakeholder child trust funds have an annual fee of 1.5%, which will eat into your investment.

Anyone can pay into the account, so encourage friends and family to contribute and it could be worth a decent sum in 18 years' time.

Some cashback websites allow you to divert the cashback earned into a child trust fund account. See our guide to cashback sites for more details. 

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