On Saturday, the first young people to hold child trust funds will turn 16 and, for the first time, have the opportunity to manage their funds themselves. So, if you or your child holds one of these accounts, what are the best options for you?
Available to people born between 1 September 2002 and 2 January 2011, child trust funds allow families to create a nest egg for their children’s future. Children are able to manage their accounts from the age of 16, but they’ll have to wait until they’re 18 to take out any money.
Which? explains how child trust funds work, how to track one down if you think you might have one, and other ways you can save for children.
What is a child trust fund?
A child trust fund is a long-term tax-free savings account. The scheme, introduced by the government in 2005 to give children financial assets as they became adults, was open to those born between 1 September 2002 and 2 January 2011.
The government sent vouchers out to parents as opening payments for the funds, with increased contributions to children from poorer families. Parents or grandparents could then make additional contributions of up to £4,260 a year into the accounts.
There were three child trust fund options:
- Cash child trust funds – similar to a cash Isa, the interest earned on savings is paid tax-free.
- Stakeholder child trust funds – savings are put into a wide mix of stock market investments, with charges capped at 1.5% a year.
- Shares-based child trust funds – accounts that allowed you to pick an investment fund for the savings, or to choose your own investments.
From 2011, the scheme was replaced by the Junior Isa.
Find out more: Child trust funds
What can a 16-year-old do with their child trust fund?
While a 16-year-old can’t choose to withdraw the money held in their child trust fund, they can have a say in what happens to it.
If a 16-year-old wants to take over the account, they must contact the fund provider. Alternatively, they can leave their parents or guardians in charge of the account until they turn 18.
If the child takes over, they can then decide how they want their money invested, and can opt to switch providers, change investment types and or choose a different investment structure.
Even if no changes are made to the account, this could be a good opportunity for children to learn responsibility for their money, and see how their fund can grow over the next two years.
Once the child is 18, they’ll be able to access all of the money in the account and spend it however they wish.
As a parent, you may worry that your children will fritter away the money you’ve saved. But you won’t legally have any say about how the money is spent.
Should you switch a child trust fund to a Junior Isa?
As of 6 April 2015, it’s been possible to switch a child trust fund to a Junior Isa. If your child has taken control of their account, this may be one option they’d like to consider.
Much like an adult Isa, money saved into a Junior Isa is tax-free. Parent deposits won’t be part of your Isa allowance but you’re only allowed to pay in up to £4,260 during the 2018-19 tax year.
The money can be invested in either a cash or stocks and shares account. Like a child trust fund, while parents or guardians are in charge of setting up and managing the account, the child can take control of it when they’re 16, and can withdraw money when they’re 18.
Currently, the best Junior cash Isa is offered by Coventry Building Society, and pays 3.5% AER on deposits. You can find out more in our guide to the best Junior cash Isas.
There could be a number of advantages to switching:
- Junior Isa interest rates are generally higher
- There are more Junior Isa accounts to choose from
- Junior stocks & shares Isas have lower fees than stakeholder child trust funds, with a wider choice of investments
- The money is still locked up to children until they turn 18
- Junior Isas automatically become adult Isas – not actually being given the money could reduce some of the child’s temptation to spend all of it.
Find out more: Junior Isa rules and allowances
How to switch to a Junior Isa
To switch your account, you should first check whether the child trust fund has any exit fees or guarantees that may be lost if you switch.
If you still want to go ahead, simply choose your new Isa provider, and fill out a Junior Isa transfer form. If you’re opening a stocks & shares Isa you’ll need to specify how you want the funds to be invested.
Submit the form to the Junior Isa provider, and they’ll carry out the switch for you, which should happen within 30 days. Once it’s complete, the child trust fund will be closed.
How to find out whether you have a child trust fund
Over the next 11 years, all children holding a child trust fund will gain access to them – but it’s estimated estimated that there are more than one million child trust funds that are ‘lost’ to their owners.
In almost all cases, these accounts were opened by HMRC: either when the parents or guardians of the child failed to do so, or when families were receiving Child Tax Credit.
It’s highly likely that these children – especially those from families claiming tax credits, who arguably need the money most – have no idea that the account even exists, and that the money in it belongs to them.
If you think you may have a child trust fund account, but don’t have the details for it – for example, because the documents have been lost over the years – you may be able to track it down.
HMRC has a dedicated service to find out where a child trust fund is held – you’ll just be asked for a few personal details. In order to access this information, however, you need to set up a government gateway account first.
Once you know where your account is held, you’ll be able to get in touch with the provider.
Child trust funds for children in care
Some children who grew up in care had a child trust fund set up for them, and The Share Foundation acts as the registered contact for these accounts.
Around two months before these children turn 16, the Share Foundation will write to them with information on how they can become the registered contact for their account.
They can then choose whether to start managing it themselves, or leave it in the care of The Share Foundation until they turn 18 and can withdraw the money.
Children’s savings accounts
If you’re hoping to save up for your child, an alternative to a Junior Isa may be a children’s savings account.
Like adult savings accounts, there are regular, fixed-rate and easy-access accounts available. Regular savings accounts tend to offer the best rates, but you’ll be required to pay in every month and access may be limited.
Unlike with a Junior Isa, you’re not restricted to what you can pay into a children’s savings account. But, if you’re paying in large sums of money, keep in mind that the interest earned in the account may be taxable.
While children have the same income tax allowances as adults – so only interest income of more than £1,000 a year would be taxable – the ‘£100 rule’ is in place for parents and guardians.
This rule states that if you, as a parent, give your child money that generates more than £100 a year before tax in interest (or £200 if both parents give money), then all of the income will be taxed as if it was your own – not just that over £100.
This could be particularly bad news if you pay tax at a higher or additional rate, as your child’s savings will not have the opportunity to grow very fast.
Find out more: Best children’s savings accounts