What happens next?
The parents of all children born in the UK between 1 September 2002 and 3 January 2011 were issued by the government with Child Trust Fund (CTF) vouchers worth between £50 and £500.
On 1 September 2020 the first cohort of these CTF beneficiaries will, upon turning 18, be able to cash in their investments and spend the money as they wish.
While many accounts have been ignored by beneficiaries, parents and advisers alike and remain quite modest, some have seen significant additional sums invested by family members.
HMRC has now published its guidance for CTF providers which, while clarifying some of the rules, still leaves some uncertainty for clients.
Money invested in CTFs, like that in ISAs, benefits from tax-free growth. Unlike ISAs, however, the current position is that when the beneficiary of a CTF reaches his or her 18th birthday the fund will mature and “cash out” – yielding a cash sum they can either spend or reinvest.
In the event that an 18-year-old were to choose the path of prudence and leave their money invested they would still receive interest or growth tax free, however they would not be able to make additional investments or make partial withdrawals from what HMRC are calling “Protected Accounts”.
If a CTF provider also offers an ISA the funds, at age 18, if not withdrawn can automatically be transferred to an ISA with the same provider. What is not yet clear is if this would count as part of their ISA allowance for the year.
The tax issue is, in any case, likely to be less important than the temptation, when presented with significant sums of cash, for teenagers to do with it what teenagers do best.
Without wishing to sound po-faced, the policy objective underlying CTFs was to provide youngsters with a financial leg-up when they need it – for example when starting a job in a new area or moving out of home. Keeping CTFs invested post 18 rather than, for example, splurging them on a post-A-Level holiday, is more likely to achieve this objective.
Don’t wait until September to act
While there is still some uncertainty around the Government’s plans for maturing CTFs a number of actions can be taken in the meantime:
- Although they cannot withdraw any money until they turn 18, children are granted absolute control over the investment of their CTFs from the age of 16. Parents or grandparents of 16 and 17 year-olds should talk to them about their options and make sure they are aware of Junior ISAs (JISAs), into which they can transfer their CTFs. JISAs often provide more flexibility than CTFs and automatically roll over into adult ISAs when the holder turns 18.
- We understand that some providers are marketing what we consider to be high-risk CTF investments direct to young people through schools and colleges. Financial advisers to parents with teenage children may wish to consider how they can best advise the whole family to help avoid a situation in which children are sold inappropriate products.
- Parents of children aged below 16 may wish to transfer their CTFs into JISA accounts now. This means that, although the children will still be able to cash their investments in at the age of 18, the default position will be to remain invested.
- It is never too early to start talking to children about their CTFs. Younger children tend to be more engaged with saving so telling them about their CTF, showing them how it is performing, and discussing prudent uses for the money can only be a good thing. Talking to children about how they might use the money in their CTFs is also a good opportunity to help them understand the concepts of short, medium and long-term investment, and the appropriate levels of risk to take in order to have the best chance of meeting their goals. For advisers these are your future clients.
This article is for authorised financial advisers only. It is not for use with clients.