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Child trust fund

The benefits and conditions relating to the child trust fund explained, with information on account comparison and saving account allowances in the UK.
In April 2005 the government introduced Child Trust Funds as part of their 'Savings and Asset Ownership' strategy. Child Trust Funds are part of a plan to give young people the ability to build savings for their future - the opening contribution for these accounts is provided by the government.

In the 2009 budget the Chancellor accounced that an additional £100 a year will be contributed into Child Trust Funds for children with disabilities, and an extra £200 for children with severe disabilities.

However following the 2010 general election the newly installed coalition government has announced plans to abolish the Child Trust Fund.

Below are the planned changes and when they are due to be introduced.

Any child born after January 1st 2011 will not be able to open a Child Trust Fund and will not receive a voucher from the government.

Any child born between August 2nd 2010 and January 1st 2011 will receive a lower amount from the government. The payments will drop from £250 to £50 or £500 to £100 depending on household income.

Any child born before August 1st 2010 is still entitled to the original government contribution of £250 or £500.

The government's promised 2nd contribution when a child reaches the age of 7 will stop from August 1st 2010.

Any parent with a child trust fund voucher can still open a new child trust fund up until the expiry date printed on the voucher.

Once a child trust fund is opened you can still contribute up to £1,200 a year to top them up or change them to a different type of fund up until your child reaches 18 years old.

In a nutshell:
  • Child Trust Funds (CTFs) have been available since 6th April 2005.

  • Each child born on or after 1 September 2002 will receive an initial lump sum payment of £250 (£500 for poorer families) from the government. A voucher will be sent to the Child Benefit claimant, usually the parent, which is used to open a CTF account with the provider of their choice.

  • Family and friends of the child, and the children themselves when older, can make additional contributions of up to £1200 a year between them.

  • The government has promised that it will make a a second and final payment into all CTFs when children reach the age of seven. Again, this will be a lump sum payment of £250 for the majority and £500 for those from lower income families.

  • No money paid into the CTF can be drawn out until the child's 18th birthday, by which time it will have grown into a small nest egg - perhaps enough to make a decent contribution towards university tuition fees or a deposit on a home.

  • Children will not be taxed on the income and gains they make on the investments in their CTF account or the matured funds, but there will be no tax relief for contributions made to a CTF account. The government has also decided that current rules governing parental gifts to a child will not apply. This is where a gift from a parent gives rise to income of more than £100 in a year and the parent is then taxed on all that income at their own tax rate.

  • To ensure no child loses out, if an account has not been opened within one year of the issue of the voucher the Inland Revenue will open a stakeholder account for the child. The parent is free to assume responsibility for that account later at any time, if they wish. The government will also provide resources to ensure parents are helped to make choices about their child's CTF including an information pack.
Your questions answered:

How far will £250 go?

On its own it will grow to around £1, 410. Once you factor-in the driving lessons and average university debts of £11,000, it wont go far. But it is better than nothing. Research carried out by Virgin Money revealed that on average, parents are prepared to contribute £38 a month into a Child Trust Fund. That, plus the Government's contribution could result in a pot worth more than £14,000 at age 18. If parents could save the equivalent of Child Benefit each month they could expect the final sum to be closer to £27,000, presuming (an optimistic) 7% annual growth.

What exactly is a Child Trust Fund Account?

Essentially, the majority of Child Trust Fund accounts invest funds in shares in a range of companies. Although to some, the stock market can seem a risky option for a child's investment, in general it will encourage better growth over time than a savings account. Many Child Trust Funds offer lifestyling; this is a technique used to maximise your child's investment. In the initial years of the account money is invested in a spread of higher risk shares chosen to maximise the growth of the capital in the account. Over time funds are transfered to progressively lower risk shares wher the focus is on maintaining capital and generating income into the account; this continues after the account matures.

What are the different types of account

Child Trust Funds fall into two categories; Stakeholder and Non-Stakeholder. Stakeholder Child Trust Funds adhere to a set of regulations brought in by the government to make it easier for parents to compare accounts. These can be added to at anytime, with any amount over £10, have minimal management fees and aim to maximise the investment through use of the stock market. Non-Stakeholder accounts may not comply with government regulations.

What the experts say:

Georgette Harrison, Director and Head of UK Retail Marketing at F&C Management commented: "The number of people without any assets is growing and is particularly marked amongst younger people. Young adults without assets have fewer opportunities, so the Chancellor's decision to give them a helping hand is entirely welcome. This fund has the potential to help people finance educational opportunities, think about saving for a house or even set up their own business. Some may even consider putting the money away for their pension. This funding will also help educate young people about saving for their futures."

"We still need a lot more detail. The City seems to have won its fight to make sure there is no cap on charges which is great because there is likely to be a far greater choice of investment. But it does mean that mum and dad have a lot of thinking to do. With well over £800 million free money falling into the City's hands in 2005, you can bet that parents are going to get an awful lot of financial junk mail. " says Anna Bowes, Savings & Investments Manager at Chase de Vere.

Virgin Money Director Gordon Maw said: "All of the good work to date from the Government could be undermined by the one announcement still outstanding. How much will providers be allowed to charge? If the industry is allowed to raise charges substantially above the current 1% stakeholder level, the £250 the Government is offering could soon be eaten up in charges. If the public are to get behind this scheme we need to demonstrate that their savings will grow from day one and won't just disappear into a salesman's pocket. The £500 the Government has offered is a great incentive for parents to start saving but on it's own it will only grow to around £1,410."

David White, chief executive of The Children's Mutual said: "The Child Trust Fund is a real opportunity to close the poverty gap. The more people we can get to save for the future of their children, the more likely we are to level the playing field for future generations."

Further information

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i also agree, it should be moved to 21 as soon as possible :) x
by cloe123 6th Jan 2010, 11:41am
i also agree that the be should be 21 rather than 18 as when i was 18 i wouldnt have spent that ammount of money wisely
by preggas 26th May 2009, 12:40pm
i totally agree aswell it is crazy giving a 18 year old that amount of money i think the goverment need to reconsider the age to say 21-22....
by amanda10 23rd Feb 2009, 1:03pm
Working it all out, the 18 year old would be left with £23,010 at the end of it and i dont think an 18 year old is responsible enough to handle that amount of money. I know i wasnt. Its a good idea for future education but it probably wouldnt go towards that if it was up to the child.
by 1Princess 22nd Jul 2008, 5:13pm
I agree, the childrens mutual are fantastic. I am an IFA (independent financial adviser) and always use them for the Child Trust Fund. They have a good few funds to choose from, and generally I would recommend the non-stakeholder ones, as with 18 years to go, the growth potential in my opinion outweighs the risk.

The only small issue with the CTF is that at age 18, your child gets the money, whether you want them to or not. This leads many people to save into alternate plans with additional funds, which puts the parent in the driving seat.

I know what I was like at 18 with money !!
by JMSquibb 28th Jan 2008, 6:10pm
I opened my son's account with The Children's Mutual and they were fantastic - i am hopeless with money and it all seemed very daunting but after looking at their website i gave them a call and they were great.. Hopefully it will save me money in 18 years time!
by Jackie78 16th Nov 2006, 9:28am