What is a Child Trust Fund?
Introduction
Child Trust Funds present an excellent opportunity for Financial Advisors. As on the 1st of September 2020, approximately 800,000 Child Trust Funds will mature each year and require direction from the account holder. Advice from a knowledgeable Financial Advisor can be invaluable to ensure the money is directed in the most appropriate way, but what is a Child Trust Fund?
What is a Child Trust Fund?
A Child Trust Fund is a tax-free, long-term savings account scheme for children born between the 1st of September 2002 and the 2nd of January 2011. Parents and guardians were given a fund voucher by the government and asked to open a Child Trust Fund. If an account was not opened by the parent or guardian, the government opened one on the child’s behalf. Due to this, many are unaware if they have a Child Trust Fund account.
The money in a Child Trust Fund is completely tax-free, including any income or profits made, and up to £9,000 can be added per year. The fund also does not affect any benefits or tax credits an individual may receive. The money in the fund belongs to the child and can only be accessed once they turn 18, however the child can take control of the account at 16 if they wish to.
The scheme ended in 2011, and the first accounts reached maturity in September 2020. According to the National Audit Office, the government paid £2 billion into Child Trust Funds and 6.3 million accounts were opened. As of the 5th of April 2021, 145,000 matured Child Trust Fund accounts were unclaimed and still awaiting instruction.
What types of Child Trust Fund are there?
- Cash Child Trust Fund – Cash deposits can be made into this account which can earn tax-free interest.
- Stakeholder Child Trust Fund – This type of account was opened by the government on the child’s behalf if the parents failed to open an account within a year of receiving a Child Trust Fund voucher. The savings in the type of account are put towards a wide mix of stock market investments and has specific rules to reduce financial risks. This account is charged based on the value of the funds in it which is capped at 1.5% per year.
- Shares based Child Trust Fund – Most or all of the money in this type of fund is invested in shares, however, does not have the same protection that the Stakeholder account offers. Savings are invested through an investment fund of the holder’s choice, or the holder may choose their own investments.
Maturing Child Trust Funds
Previously, the policy for Child Trust Funds stated that the tax-exemption would cease once the account reached maturity when then child turned 18. However, the policy was changed in 2020 to protect the investments and ensure that the money would retain its tax-free status, pending action from the account holder.
At maturity, the investment is moved to a protected account until instruction is given. Account holders have three main options when deciding what to do with their investment:
- Option 1 – Remove all of the money and spend it however they please.
- Option 2 – Keep some of the money invested and take out the rest.
- Option 3 – Keep all of the money invested for the future.
To learn more about the changes made to the policy, read the policy paper on the government website here.
Investing Mature Child Trust Funds
Child Trust Fund account holders may choose to place their money in a savings account once it has matured. However, the interest rate can often be low and money in a savings account is subject to inflation, potentially eroding the value of the savings.
Choosing to invest the money into funds can be a more lucrative option which protects against inflation. However, income is not guaranteed as investments can fall and rise. This is why it can be beneficial for account holders to consult with a Financial Advisor. A Financial Advisor will be able to offer insight into the products available to the account holder and give advice on potential investment opportunities.
Conclusion
Child Trust Funds are a way for young adults to begin saving and to develop positive financial habits. When the funds mature, it is important that the account holder is aware of their options, which is why consulting a Financial Advisor can be so valuable!
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