The first Child Trust Funds (CTFs) are due to mature this September, giving those who turn 18 in that month access to a useful nest egg.
The Chancellor has more than doubled, to £9,000, the amount that can now be saved into a CTF, and its replacement the Junior ISA (JISA). Parents and other family contributors now have the opportunity to contribute more towards younger family members’ savings. Both CTFs and JISA plans can be cashed in by children who have them from their 18th birthday.
The value of CTF plans will vary considerably. Some families will have made substantial contributions over the years, and there may be further investment growth on top. Others will find that this ‘trust fund’ contains just the initial payment made by the government when they were launched in January 2005. All children born between 1 September 2002 and 2 January 2011 were eligible.
Parents initially received a £250 payment from the government to invest in either a cash or stocks and shares CTF plan (lower income families received a £500 payment). However, this was later cut to just £50 before the scheme was withdrawn in 2011. CTFs were then replaced by JISAs, although contributions could continue for existing CTFs. JISAs didn’t come with any ‘free’ money from the government, but the annual savings limits have increased regularly over the years.
A child can’t have both a CTF and a JISA. However, it is possible to transfer a CTF into a Junior ISA. Although the tax benefits are the same, interest rates paid on cash JISAs are higher than on the older CTFs. There is also more product choice.
Saving tax free
With each of these accounts, savings can roll up in a tax-free environment, as there is no income tax to pay on any interest earned (in cash holdings), or capital gains tax (CGT) to pay on investment returns. For those able to save more substantial sums this may be a benefit. It’s also worth noting that parents and grandparents can make contributions into these accounts on top of their own ISA limits.
Neither child nor parent can access these funds before the child’s 18th birthday, at which point a JISA rolls into a standard ISA in the child’s name. Those with CTFs can roll their money over into an ISA at this point too, if they don’t want to cash in these savings. This may be the preferred route that parents wish to encourage. It is worth noting that these funds are the child’s investments and from 18 the child can withdraw funds without a parent’s consent, if this is a concern, designated investments could be a more suitable option.
For most young adults, coming into these savings may be their first experience of managing substantial sums, so it’s worth discussing with them in detail. There are likely to be short term calls on the funds for higher education or other costs, but there are additional saving options such as personal pensions. These may seem a very long term investment indeed for an 18 year old, but the earlier savings start to build, the better.
The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The tax efficiency of ISAs is based on current rules. The current tax situation may not be maintained. The benefit of the tax treatment depends on individual circumstances. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
The value of tax reliefs depends on your individual circumstances. The Financial Conduct Authority does not regulate tax advice, and tax laws can change.