More than £9bn is “languishing” in child trust fund accounts, and many people would be better off moving their cash elsewhere, it was claimed this week.
On Tuesday, HM Revenue and Customs published official data showing there were just over 6.1m CTF accounts in existence, and that the average sum in each was £1,500. These figures, the latest available, go up to April last year.
The majority of accounts – more than 5.1m – did not have any money paid into them during the 12 months from April 2019 to April 2020. That suggests some have been forgotten, and that many youngsters may be unaware there is a pot of cash with their name on it.
If your child’s CTF account has slipped off your radar of late, maybe now is the time to check how it is getting on.
Launched by the Labour government in 2005, child trust funds – or baby bonds – were long-term tax-free accounts designed to help children learn about saving and build up some cash before their 18th birthday.
Every child born between 1 September 2002 and 2 January 2011 was awarded a cash endowment from the state. For most, the payment was £250, with £500 to those from the poorest families. Several hundred thousand kids also received a top-up payment from the government – again, either £250 or £500.
CTFs were scrapped at the end of 2010 but those already in existence were allowed to continue, with family and friends able to carry on topping them up with up to £9,000 a year.
In terms of the accounts, broadly, it was a choice between cash savings accounts and ones that predominantly invested in shares.
The first “child trust fund babies” have now turned 18 and have been able to access their money – once they get to that age, they can spend it or reinvest it. However, the youngest ones are currently only aged 10, so that means quite a few years left to play with.
If you hold a CTF for your child, you have a number of options. For example, you can leave it as it is or you could transfer to another CTF provider.
View image in fullscreenHMRC data shows there are just over 6.1m CTF accounts in existence, and that the average sum in each is £1,500. Photograph: Image Source/Alamy
If you have a cash CTF, check what interest rate you are getting. If it is paltry, Skipton building society has one called Child Trust Fund Issue 4 that accepts transfers in and is paying 2%. It has to be opened in a branch or by post.
Since 2015, anyone with money in a CTF has been able to transfer it to a Junior Isa, and for many that will probably be the wisest thing to do as you will usually be able to get a better return.
The two types of account have a lot of similarities but Junior Isas have a number of advantages, says Sarah Coles, a personal finance analyst at the investment firm Hargreaves Lansdown.
CTFs often offered a fraction of the investment choices now available through Junior Isas
Top-paying cash Junior Isas that accept transfers in from CTFs include Dudley building society’s account, which pays 2.5% on balances of £2,500-plus (it is 1.4% on balances below that), and Coventry building society’s Junior Cash Isa (2), which pays 2.25% and has a minimum balance of £1. Bath building society also has one paying 2.5% but there are restrictions on who can open it.
Coles says if you have an investment CTF, “you may be paying over the odds in charges” because investment Junior Isas usually have lower fees.
On top of that, CTFs often offered a fraction of the investment choices now available through Junior Isas, many of which offer a wide range of funds, shares and other investments to choose from.
A lot will depend on whether you want help or are happy to go it alone, how much risk you are willing to accept, and so on. A good first port of call for an investment Junior Isa may be a company such as Hargreaves Lansdown or AJ Bell, both of which accept transfers in.
With the Hargreaves Lansdown account, you can choose the investments for your child – it offers access to more than 3,000 funds, UK and overseas shares, investment trusts, bonds and exchange-traded funds, and there are some suggested options on the website.
AJ Bell’s works in a similar way, with more than 2,000 funds and various shares and other products to choose from, plus investment ideas from its specialists if you would like help picking your portfolio.
Both will let you invest from £25 a month.
In December, the investment firm the Big Exchange – co-founded by the Big Issue – launched a Junior Isa that invests only in funds making a positive difference to the environment and society. The firm has 46 funds to choose from and, again, you can invest from £25 a month. It is currently asking people to transfer their CTF to a Junior Isa with their existing provider and then transfer it to the Big Exchange’s product.
