What Are Child Trust Funds?
For short, child trust funds, or CTFs, are a type of savings account that earns interest while providing parents with tax benefits.
A child can have more than one CTF opened in their name, and they will all earn the same rate of interest. They’re also called “Junior ISAs1” because there is already an adult ISA similar to this but aimed at adults over 18 years old who don’t pay any taxes on income that doesn’t come from a salary.
Now that I have your attention,
A CTF is designed to grow and accumulate wealth for the future, not unlike an RRSP you might have or contribute to through your employer’s retirement plan. The earlier that parents start contributing money into one of these accounts, the more time it has to grow until they are ready to use it as part of their post-secondary education funding or other savings goals like buying a car or a home.
The government will match contributions up to £500 per year until the child’s 16th birthday in this type of account, giving them some head-start when it comes time for their education, but they are not limited to using these funds just for that purpose. You could also use one or more CTFs as part of your retirement savings plan and contribute if you like.
How Do Child Trust Funds Work?
A child trust fund is a type of long-term investment that parents can make for their children.
Parents contribute money to the account, and it grows while they wait until their child starts college or other post-secondary education, right after which time they withdraw this savings to put towards tuition fees.
The funds in these types of accounts have tax advantages because any amount earned from the investment will not be taxed every year it accumulates.
It’s important to note that if you contribute more than £500 per year to your CTF2, you should consult with an expert before proceeding. This is because the CTF can be seen as a type of retirement savings account, and with such high contributions, you may find that it will not grow enough to meet your end goal.
Some parents like to pay for their children’s education before they start work themselves so that their children do not have student debt when they graduate from college or other post-secondary institutions.
With child trust funds, parents can put money aside while waiting until tuition fees need to come out to ensure that there are no financial burdens on any future students.
What Can a 16-Year-Old Do With Their Child Trust Fund?
If a child is 16 or older, then they can start withdrawing money from the account. The rules around withdrawals are different depending on how old you were when your CTF was opened and who set it up for you.
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For example, if someone aged 18 sets up a trust fund for themselves at age 15, this means that there are no restrictions against them taking out all of their funds as soon as they reach adulthood (16). However, should a parent open an account in their children’s name before the child reaches 17 years old, they need to apply to take money out without any penalties and with interest accrued until the 23rd birthday. It is important to note that no withdrawals are permitted without penalty for accounts opened up after the child is 16.
Why Did Child Trust Funds Close?
The Child Trust Fund was closed to new applicants in 2010 when the government-funded scheme for payments under welfare reform. The government had hoped that by closing, it would save £60 million per annum and improve the take up of other benefits such as Working Tax Credits, which are also funded out of general taxation revenue.
However, since then, evidence has emerged that broadening access to CTFs could significantly reduce poverty rates amongst children raised on low incomes or who experience a period living below the poverty line before 18 years old.
Here’s an interesting fact:
In 2012 only around one-third (35%) of eligible families opened an account with their child’s National Insurance number – meaning there are still many more disadvantaged children than those currently enrolled in a CTF plan.
Does a Child Trust Fund Affect Benefits?
No, a Child trust fund does not affect benefits. The government introduced universal child benefit in April 2016 to end the distortionary effects of means-tested welfare payments on work incentives and help encourage people into work or more hours.
However, it is possible to make contributions from a child trust fund into an adult’s ISA. This can be used as a tax-efficient way of saving for retirement and will not affect benefits eligibility if the person has reached pension age or is already receiving certain state pensions.
If they are under 18 years old, then there are no restrictions on withdrawing money to spend on approved items such as education; travel; youth-related activities like skiing or work experience abroad; part-time jobs where their earnings could go towards spending money in the future (e.g., apprenticeships).
People with disabilities aged 16+ may use up to £3000 per year from their child trust fund if they need help with day-to-day living costs.
Should I Switch from a CTF to a Junior ISA?
A child trust fund is a tax-efficient way of saving for retirement. You might not be eligible to receive certain types of state pension, but you can still use it as a form of investment in your future.
Junior Isas are also great ways to save – and they don’t count towards the total amount you’re allowed to put into your current ISA or CTF allowance each year. One key difference between them though: if you have over £1000 saved up in Junior Isa’s then any additional savings will go onto an adult account where all withdrawals after age 18 will incur income taxes (either at 20% introductory rate or 40%, depending on how much money has been withdrawn).
The same doesn’t apply with Child Trust Funds – so you can save up to a whopping £4000 as long as it’s done before age 18. It also means that if your child wants to make early withdrawals, they’ll be taxed at the same rate as any other withdrawal.
You usually need to pay into CTFs for around 12 years (or until your child reaches 18) and then decide where their money is invested: in either stocks or shares, cash savings accounts like the ISA, or a combination of the two.
How Do I Transfer a Child Trust Fund to Junior ISA?
You should transfer your Child Trust Fund to a Junior Isa if you are under 18 or the child has already turned 18. Moving from one account type to another can be done in just two days and without losing any investments that have been made so far.
Many providers offer sponsored children’s accounts for free, which means they don’t need their name and address to open an account – it is also possible that these funds will grow tax-free until age 18, but this varies depending on contributions being taxed as savings or shares.
Here’s the deal:
Paying into a CTF isn’t compulsory: you could wait a few years for your child to start a job and be able to save on their own, but you need to make sure they are aware of the benefits of saving.
The money in these accounts is only available until age 18 – so it’s essential that when this time comes, your children can easily access funds from other savings if they want them at all stages of life.
You should also find out what investments have been made by the CTF provider already, as some providers will invest more aggressively than others.
If parents or guardians impose no restrictions, then take care not to spend anything before an account matures: this means even minor items like sweets while shopping with friends might cost too much.
How Do I Find Out If I Have a Child Trust Fund?
Reviewing your payslips can also help you determine if a Child trust fund has been created for you.
Look at the section that shows ‘PAYE’ – this is what tax and NI contributions are deducted from before paying any income. What’s left of this figure will be shown as net pay, but some employers may call it something different like Net Salary or Gross Pay. Suppose there are periods where deductions have not been taken for PAYE purposes.
In that case, this could mean that an account exists with HMRC, which means they have accepted liability on behalf of someone else (in most cases, the employer). You’ll need to contact HMRC directly to confirm whether or not there is one in your name.
If you’re still not sure, it’s best to contact HMRC, who will be able to give further advice on what next steps might need to be taken to establish the existence of your child trust fund.
Child Trust Funds for Children in Care
Child trust funds for children in care are complex and sensitive, so it’s best to consult an expert for advice.
The different situations can vary a lot – from whether the child has been looked after by their parents or someone else before coming into care; to what sort of arrangements are made when they move on from being cared for (either back to live with their parents, guardians or family members).
One thing that does not change is that any money will be paid out at 18-years old rather than 16 as under usual circumstances.
We should trust children with their own money. Trust funds for kids can help them to learn about managing finances and developing good habits from a young age. Let’s allow our future adults to grow up in this way instead of saddling them with debt before they even understand what it is.