55,000 child trust funds to mature every month: how to beat high charges and low rates

On 1 September, the first group of child trust fund (CTF) savers turned 18 and were able to unlock their nest egg. According to HMRC, 55,000 more accounts will mature each month, but what should you do with your money once you have control of it?

In total, there are 6.3 million CTF savers in the UK and according to the Office for National Statistic (ONS),the average teenager with a maturing account will get £650 each. However, research from investment firm Unity Mutual shows that almost half of teens will be receiving more than £5,000, with 27% accessing upwards of £20,000.

With sizeable savings pots to look after, there are fears they could be eroded by high fees, poor returns or low interest rates. Which? research has found millions could be paying 1.5% annually in investment fees, while almost identical rival products charge as little as 0.21%. Meanwhile, cash CTF savers are being paid paltry returns that could be beaten by more competitive Junior Isas.

Here, Which? explains how CTFs work, why they're under fire and your options for managing your cash.

What are child trust funds?

Child trust funds (CTFs) 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 to give all children a financial boost by the time they reach 18.

The money is locked away, but when the child turns 16 they can legally take over responsibility for their account and make decisions about the fund, such as switching to another provider or transferring to a Junior Isa (Jisa).

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 fundsThese 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 fundsThese types of accounts allowed you to either pick an investment fund to put your children's savings into the stock market or pick your own investments.

The government sent vouchers out to parents as opening payments for the funds worth £250 or £500 for children from families with low incomes.

According to HMRC there are nearly 70 approved CTF providers, although there's been a series of mergers and acquisitions over the years, which means yours could now be managed by a different firm.

• Find out more: how child trust funds work

What's the problem with CTFs?

CTF's were discontinued in 2011. By this time, interest rates on CTFs had fallen, while the charges for investments were high compared with charges on stocks and shares Jisas.

Cash CTFs

Many CTFs offered interest of up to 6% AER when they were introduced in 2005. But by 2011, some had dropped to lows of 1%, a trend which has continued.

OneFamily's cash CTF account tracks the Bank of England base rate, and offers between 0.35% to 1.35%.

Since 2015, CTF account holders have had the option to transfer to a Jisa, which offer much better rates generally. For example, NS&I's cash Isa offers 3.25% AER.

Savers turning 18 years old will have the option to move their CTF savings into an adult Isa. Rates on these accounts are less impressive compared with Jisas (the top instant-access account pays 0.96% AER), but could still offer a better return compared with leaving cash with your existing CTF provider.

Investment CTFs

There's a charge cap of 1.5% on investment CTFs and most providers in the market charge the maximum fee.

The cap only applies until the child is 18, meaning from September, firms are free to charge whatever they like unless the government imposes new limits.

OneFamily manages the most stakeholder CTFs, including Asda, Barclays, Bounty, Santander and the Post Office.

Which? has found the charges for the main UK CTF providers, which you can see in the table below. Note, we were unable to find data for Allied Irish and Tesco Bank.

Some providers may charge a dealing commission. For example, Pilling & Co's commission per deal is 1.65% of the first £10,000 value and 0.5% thereafter on any excess.

But with most providers, such as OneFamily, the 1.5% fee covers everything.

Stocks and shares Jisas and Isas can be much cheaper.

Vanguard - a Which? Recommended Provider (WRP) - charges an account fee of 0.15% for its investment Jisa and a fund fee as low as 0.06% for the Vanguard FTSE 100 Index Trust, costing you a total of 0.21% a year.

Our second WRP AJ Bell charges 0.25%, excluding costs for buying and selling funds and shares (£1.50 for funds and up to almost £10 for shares).

Vanguard senior investment planner, James Norton, says: 'When CTFs launched in 2005, the 1.5% stakeholder investment charge cap was decried as impossibly low in some quarters of the fund management industry.

'Today, these charges look unconscionably high. Investors in maturing stocks and shares CTFs who fail to take action run the risk of continuing to pay high charges on their investments.'

According to Vanguard analysis, if you keep your CTF money invested for another 10 years you would be nearly £400 better off moving to a platform with lower charges.

• Find out more: what is a stocks and shares Isa?

Investment risk

Most CTFs are invested in funds that track the performance of the stock market, so in times of economic downturn, high charges can erode investments.

This is especially true now, as the UK is in the deepest recession on record as a consequence of the coronavirus pandemic.

Interactive Investor research shows that parents who invested the £250 vouchers in the FTSE All-Share index when CTFs were launched in January 2005 and contributed £100 a month thereafter would have experienced a £6,112 loss since the end of 2019 (£33,052 at 31 December 2020 versus £26,940 by 31 July 2020).

• Find out more:what coronavirus means for pensions and investments

What can I do with my CTF?

If you don't want to keep your CTF, you have a number of options.

Cash it in If you have turned 18 years old, you can contact your CTF provider and ask them to pay the money into your current account. You'll lose any tax perks you would have had with a CTF, but your personal savings allowance (up to £1,000 for basic-rate taxpayers) and capital gains tax allowance (£12,300 for 2020-21) could be enough to protect any gains from tax in the short term.

Transfer it to a Jisa If you're over the age16 and under 18 years old, you can go for a Jisa. New rules mean any transfers won't count towards the 2020-21 £9,000 Jisa limit.

It's worth noting that, if you have a CTF, you won't be able to pay into a Jisa at the same time; you'll have to transfer over money held in a CTF within 60 days of opening a Jisa.

Transfer it to an adult Isa If you've turned 18, you won't qualify for a Jisa so can open an adult Isa, including the lifetime Isa.

While new rules mean any transfers won't count towards the £20,000 limit in a cash or stocks and shares option, transfers to a lifetime Isa will count towards the £4,000 limit.

Leave it be If you've turned 18 years old and do nothing with the money your CTF provider will either transfer it to an Isa, if they offer one, or they will transfer it into a 'protected account', where it will remain tax-free.

• Find out more: Jisa rules and allowances

How to trace a lost child trust fund

HMRC data shows that around 700,000 CTFs are dormant, meaning no action has been taken on the fund since they were set up.

Meanwhile, The Share Foundation estimates there's around one million lost CTFs, which often happens when a family moves home and forgets to let their CTF provider know.

Child Trust Funds can be found using the Government Gateway service, which requires a login or registration. A CTF unique reference number or national insurance number is also needed.

Alternatively, The Share Foundation charity runs a free CTF tracing service. 

Some children who grew up in care had child trust funds set up for them. The Share Foundation acts as the registered contact for these accounts.