Young people with a Child Trust Fund (CTFs) could see their savings automatically rolled into a new tax-free savings accounts at maturity under new government proposals.
The first Child Trust Funds are due to mature in September this year and, under current arrangements, will be automatically cashed in once the account holder turns 18. CTFs could instead be automatically rolled over into another account that continues to shelter the young saver’s cash from the taxman.
Child Trust Funds were launched in 2005 as a way to encourage parents to start saving for their children. Children born between September 1, 2002 and 2 January 2, 2011 received between £250 or £500 to be invested on their behalf. Parents, family and friends could continue to contribute to the account, with all gains tax-free. More than 6 million CTF accounts were opened and no money could be withdrawn until the child reached age 18. That means the first tranche of accounts will mature in September 2020.
But CTFs were discontinued in 2011 and replaced with the Junior Isa. For years, children with CTFs were left in limbo as savings providers stopped offering new products as Jisas took precendence.
In 2015, the Government ruled that money held in CTFs could be transferred out to a Jisa. For those who kept their money in a CTF, the money would automatically cash out once the accountholder turned 18.
But many have considered this to be unfair. Junior Isas are automatically rolled into adult Isa accounts when a child reaches 18, meaning they continue to enjoy their tax-free status. The Government’s latest move looks to be levelling up the playing field.
Adrian Lowcock, head of personal investing at Willis Owen, says: “The good news for CTF holders is the government has laid down a statutory piece of legislation to ensure those unclaimed accounts don’t lose the tax-free wrapper. This means that when it comes to reclaiming the account, even those over 18 years old will still have a pot of tax-free cash to help them get started in adulthood.”
While around 800,000 CTFs are expected to mature every year from September, many of these accounts have been lost over the years. Indeed, it is estimated that as many as 1.8 million young people with a total of £2 billion may not realise they have a CTF.
The youngest Child Trust Fund holders will not see their accounts mature until 2029 and could be better off moving their money to a Junior Isa in the meantime. As well as there being far more Jisas to choose from, these accounts typically have higher interest rates for cash and lower charges on investments.
Rachael Griffin, tax expert at Quilter, says: “Many people won’t know they have these accounts because they have simply forgotten about them or did not know they exist. While it is great account holders now won’t receive any unexpected losses due to tax, these people need to be aware they have money just idly sitting in an account potentially achieving very little.”
Parents can track down a lost CTF through the government website; they will need to sign into the Government Gateway where you fill out your child’s details to find out the provider holding their CTF.