This month will see the first Child Trust Funds (CTFs) reach maturity and turn 18. This means that many 18-year olds – some of whom will be heading off to university, others potentially embarking on a gap year – are about to receive full, legal entitlement over their plans.
CTFs were set up by the government and designed to help children reached adulthood with a savings account. They were made available to children born between 1 September 2002 and 2 January 2011 but have since been replaced by Junior ISAs (JISAs).
Many parents began investing in a CTF to help their children get through university without accumulating a large amount of debt or to help to pay for such items like their first car.
Jason Hollands, managing director at Bestinvest, looks back on these funds, and the options available to both children and their parents.
“The value of maturing CTFs will depend on both the amounts invested and whether these went into investment or cash savings. Cash isn’t a great option for long-term savings as inflation silently eats away at the real value and returns on cash savings have been especially dismal over the last decade, thanks to ultra-low interest rates.
“Thankfully, the default option for CTFs – known as stakeholder accounts – were predominantly invested in the stock market not cash. For those children whose parents and guardians invested their CTFs into stock market funds, especially where the parents added further cash to the plans over the years, the sums accrued can be pretty significant given the very strong returns that equity markets have made over the last few years.
“When a CTF matures when the account hold turns 18, the default position is that it becomes an adult ISAs and any investments held within it remain intact. Therefore, unless the owner chooses to make withdrawals, it will continue to remain invested and hopefully grow further over time.”
“By keeping the CTF running as an adult ISA, rather than used to fund day to day college expenses, the sum might instead be used to finance the deposit on a first home purchase. For those committed to doing this, a useful tip is to use some of their former CTF/adult ISA each year to open up a slightly different type of investment account known as a Lifetime ISA or LISA for short. These are designed specifically for younger people (18-40), to enable them to build up a deposit for their first property purchase.”
Risks associated with CTFs
Adrian Lowcock, head of personal investing at UK investment platform Willis Owen comments: “There is a risk that some accounts will remain dormant and money stays in the funds unclaimed. This is largely unavoidable because CTFs were automatically allocated and invested if the parents of the child didn’t act on it.
“Because the CTF is linked to your [child’s] National Insurance number the government should be able to help and look into ways of drawing attention to any unclaimed and dormant accounts. This can help reduce any waste of taxpayers’ money and ensure that the money gets to those who probably need it the most.”