Child Trust Funds start maturing
The first Child Trust Funds (CTFs) are starting to mature this month, potentially gifting teenagers a windfall on their 18th birthdays.
Launched in 2005, but available for children born on or after 1 September 2002, about £700m of CTF assets will mature this tax year and a total of £7.5bn over the next decade, according to HMRC figures. HMRC says about 55,000 CTFs will mature each month from now on.
CTFs offered cash vouchers worth £250 (or £500 for low income families) to get them started, then another voucher on the child’s 7th birthday.
When they were opened, parents had the option of choosing to invest in cash or funds that invested in stocks and shares.
Of the 6.3 million CTFs opened for children born between September 2002 and January 2011, about 4.84 million of them were invested in funds that invested in stocks and shares, but more than a million were invested in cash.
Shares lead to better returns than cash
According to NFU mutual, those families who invested in shares are likely to have seen better returns.
It found that if £250 was invested in the FTSE All-Share index in April 2005 it would be worth £590.34 now, but if had been invested in the average cash savings account, it would have grown to just £319.40.
Sean McCann, chartered financial planner at NFU Mutual, said: “Many play it safe when it comes to investing for children and keep the money in savings accounts, but families who invested in share based funds may be surprised by the returns they’ve made.
“These figures demonstrate the longer-term potential of the stock market and how taking more risk can produce better returns when investing for children.”
What should teenagers do with the money?
According to The Share Centre, the average CTF portfolio is worth £877.15, equivalent to 3.5 weeks of average earnings or five weeks of student maintenance.
This money is now in the hands of young people who may be unsure what to do with it. However, the Share Centre found young adults are likely to take a cautious approach when managing this money.
More than a fifth (21%) of young people said they felt cautious when deciding how to invest their money, while one in five young investors also reported stress (20%) and nerves (20%) when deciding which companies or assets to buy.
Despite the nerves, investing this money, or deciding to remain invested, is a decision that could pay off in the long-term. Analysis by The Share Centre shows the average portfolio could be worth £1,125.70 within five years if invested, compared to just £922.10 if saved in the average cash savings account.
Andy Parsons, head of investments and product proposition at The Share Centre, said: “Many parents may be nervous about their children gaining access to the money they have built and managed for them over the past 18 years. However, our research shows this generation are very cautious and risk-averse when it comes to managing their money.
“Investing for many young adults is uncharted territory, it’s therefore understandable that many feel nervousness and caution throughout the process. In today’s environment however, with interest rates near zero and this generation facing new and unprecedented financial challenges in the wake of the pandemic, investing is a crucial way for young adults to grow their savings meaningfully over the long-term and enable them to achieve their financial goals. Allowing this initial unease and nervousness to deter them from investing altogether could therefore be a costly mistake.”