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21 Jan 2020

Child trust fund savers turning 18 to get Isa tax boost

Find out how the new rules will affect children's savings

Hundreds of thousands of maturing child trust fund accounts will be automatically moved to adult Isas later this year thanks to new government rules being brought in to protect their tax-free status.

Due to come into force from 6 April 2020, the rules also state that the cash moved to an Isa won't count towards the saver's annual Isa allowance for that year.

Six million child trust funds were set up for children born between 1 September 2002 and 2 January 2011. From September this year, the first wave of account holders will turn 18.

However, an estimated three million young savers might not realise they have an account, or have lost track of it. This could mean up to £2.5bn of savings being left in limbo.

Here, we explain what child trust funds are, what these changes mean for you, and how to find out whether you have a lost account.

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What is a child trust fund?

Child trust funds (CTFs) were first introduced by the government in 2005 as a way to give all children a financial boost when they reached the age of 18, and to encourage long-term saving.

They were discontinued in January 2011 and replaced with the Junior Isa.

Parents or grandparents could add to the government's contributions. At launch, it gave most children £250 (lower-income families got £500) with a top-up of the same amount when the child turned seven.

This was scaled back from August 2010, to £50 for the majority of children and £100 for those from lower-income families, and no additional top-up.

The funds could be invested in either a cash account, a 'stakeholder' stock market investment account or a shares-based fund.

When the child turns 16, they can manage the fund themselves, but no withdrawals can be made until they're 18.

The first children included in the CTF scheme will turn 18 in September of this year, at which time the accounts will mature.

What will be changing for maturing CTFs?

The new CTF rules have been widely praised as a positive step for savers as it ensures their cash can remain shielded from tax.

The transfer to an Isa can be instructed by the saver's parents, or the saver themselves (if they're over 16), but it will also take place if there have been no instructions from the account holder.

The CTF account will either be changed to a 'matured CFT account', a cash Isa or a stocks and shares Isa, offered by the original provider.

All of these accounts will remain tax-free, so any interest earned would not count towards the saver's personal savings allowance.

The Isa regulations have also been amended so that any savings transferred from a matured CTF will not count towards the saver's annual Isa limit. In 2019-20, each person has an Isa limit of £20,000, which is the maximum amount that can be paid in during the current tax year.

Without this change, money saved in CTFs would have lost its tax-free status, as the only option was to cash it in.

How to trace a lost or forgotten CTF

As CTFs were set up automatically by the government, many people may have funds saved without knowing about it.

If you think your child may have a CTF but you don't have the details, you can trace it using HMRC's Child Trust Fund tracing service.

You must either be the child who owns the account (aged 16 or over) or be the child's parent or legal guardian to use this service.

It also requires a Government Gateway ID. If you don't already have one, you'll need your National Insurance number plus another form of ID such as a passport or recent payslip to set it up.

For children who grew up in care, a trust fund would have been 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 Centre 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 the account themselves, or to leave it in the care of The Share Foundation until they turn 18, when they can withdraw the money.

Should you switch a CTF to a Junior Isa?

Younger CTF holders still have several years left until their account matures, with the option to switch their funds to a Junior Isa.

Junior Isas have several similarities to CTFs: savings are held tax-free; there's an annual cap on how much you can save (£4,368 in 2019-20); money can be invested as cash or in a stocks and shares account; and children can manage the account from 16 years old, but only withdraw money once they turn 18.

However, Junior Isas have a few extra benefits:

  • Better rates: cash Junior Isa interest rates are generally higher than CTFs. The current top rate pays 3.6% AER.
  • More choice: there are more Junior Isa accounts to choose from.
  • Lower fees: Junior stocks and shares Isas have lower fees than stakeholder child trust funds, with a wider range of investments.

Before you make the switch, check whether there are any exit fees you'll have to pay that will outweigh the benefits of moving, and if there are any guarantees that will be lost if you move.

If you decide to go ahead, you simply need to select your chosen Isa provider and fill out a Junior Isa transfer form. The new provider should then take care of the switching process and close the CTF within 30 days.