What are child trust funds?
Child trust funds are tax-free savings products for children born between 1 September 2002 and 2 January 2011, which are now closed to new savers.
They were introduced in April 2005 to encourage long-term saving and give all children a financial boost by the time they reach 18. The government also made a contribution of between £250 and £500 to boost each fund.
There were three child trust fund options at the time:
Cash child trust funds: Very similar to a cash Isa, these accounts earn tax-free savings interest.
Stakeholder child trust funds: These are accounts see the savings you make for your child put into stock market investments. Stakeholder rules mean that charges are capped at 1.5% a year, and they have to be invested in a wide mix of investment types.
Shares-based child trust funds: These types of accounts allowed you to either pick an investment fund to put your children's savings onto the stock market, or pick your own investments.
How do child trust funds work?
The government sent vouchers out to parents as opening payments for the funds, with increased contributions for children from families with low incomes.
Once the fund was opened, parents or grandparents could make additional contributions of up to £4,260 a year.
If you don't pay in the full £4,260, the remaining allowance cannot be carried over into the next tax year.
You can make deposits into stakeholder accounts via cheque, standing order and direct debit. Savings and share providers may vary, so you should check which kinds of payments they accept.
When the child turns 16 - which happened to the eldest children in September 2018 - they have the opportunity to manage the funds themselves, but they can't withdraw any money until they turn 18.
Child trust funds will all mature over the next few years, once the children who have them have turned 18.
If your child is terminally ill before they turn 18, they can take money out of their child trust fund account early. If they die, the money will pass to whoever inherits the rest of their property and possessions.
What can a 16-year-old do with their child trust fund?
When a child with a child trust fund turns 16, they can take control of the fund. To do this, they have to contact the fund provider.
Then, they can decide how the money is invested, switch providers, change the investment type or choose a different investment structure.
If the child doesn't want to manage their fund, they can leave their parents or guardians in charge until they turn 18, when they'll be able to withdraw it.
Why did child trust funds close?
CTFs were discontinued in January 2011, and replaced by Junior Isas.
By this time, some interest rates on CTFs had fallen, while the charges for investments were high compared with charges on Junior Isas.
However, the government do not make any kind of contribution towards Junior Isas - so your child will only receive whatever money you deposit for them.
On 6 April 2015, the government made it possible for people with CTFs to switch to more flexible Junior Isas.
Find out more in our guide to Junior Isas.
Does a child trust fund affect benefits?
No - money held in a child trust fund will not affect any benefits or tax credits, and there's no tax to pay on the interest generated by your child trust fund savings.
Should I switch from a CTF to a Junior Isa?
There are a number of reasons why you should switch:
- Interest rates are higher in Junior cash Isas
- There are more Junior Isas in the market to choose from
- Many child trust funds don't allow new investments
- Junior stocks and shares Isas are significantly cheaper - you can expect to pay annual fees of between 0.5% and 1%, compared with 1.5% in share-based child trust funds.
- Junior stocks and shares Isas have a much wider choice of investments
- The money will also be locked up until your child turns 18
It's worth noting that, if your child has a CTF, you won't be able to pay into a Junior Isa for them at the same time - so, if you want to take advantage of Junior Isa deals, you'll have to transfer over money held in a CTF within 60 days of opening a Junior Isa.
Find out more: Best Junior cash Isas
How do I transfer a child trust fund to Junior Isa?
Before switching to a Junior Isa, it's important to check the value of the child trust fund you have, particularly for share-based child trust funds. It's also worth checking if there are any exit fees or guarantees that might be lost if you switch away.
From there, you'll need to choose your new Junior Isa provider:
- Our comparison tables highlight the best-rate Junior Isas if you want the top interest for cash savings.
- If you prefer to invest the money. read our reviews of the biggest stocks and shares Isa providers.
Once you've found a new home for your kids' savings you'll need to complete a Junior Isa transfer form, with your child's details and information about your child trust fund. If you're opening a stocks and shares Isa, you'll need to specify where you want the money invested.
Once you've submitted this to your new Junior Isa provider, it will carry out the switch for you.
The switch should be completed within 30 days, and the child trust fund will be closed.
How do I find out if I have a child trust fund?
If you think you have a child trust fund - or you're not sure and want to check - HMRC has a dedicated service to find out where a child trust funds is held.
You'll be asked a few personal details in order for them to track it down - but you'll also have to set up a government gateway account first.
Once you know where the account is held, you'll be able to contact the provider and - if you're over 16 - gain control of your account.
It's estimated that more than one million child trust funds are 'lost' to their owners. In almost all cases of having a 'lost' account, it's because it was opened by HMRC - either because the child's parents or guardians failed to do it, or when families were receiving child tax credit.
It's highly likely that these children still have no idea these accounts exist, which is unfortunate given they're likely to come from low-income backgrounds and could arguably benefit from the money the most.
Child trust funds for children in care
Some children who grew up in care, and were born between the eligible dates, had child trust funds set up for them. The Share Foundation acts as the registered contact for these accounts.
Around two months before these children are due to turn 16, The Share Foundation will write to them to let them know how they can take over as the registered contact for their account.
The individuals can decide whether they want to manage the account themselves, or leave it in the care of The Share Foundation until they turn 18 and can withdraw the money.