First Child Trust Funds about to come of age
CTFs were introduced by the government in January 2005 to encourage families to save for their children’s future. They offered cash vouchers worth £250 (or £500 for low income families) to get them started.
CTFs were available to children born between 1 September 2002 and 2 January 2011, so the first ones mature next month when the oldest children reach 18.
New applications for CTFs closed on 2 January 2011 and have since been replaced with the Junior ISA, but contributions can still be made to existing CTF accounts.
Laura Suter, personal finance analyst at investment platform AJ Bell, said: “How much of a windfall they get will depend on what the government put in in the first place, if their parents added to it and what return they’ve got on their money during those 18 years.
“Someone who got two payments of £250, one at birth and another on their seventh birthday, which was invested in the FTSE 100 but made no further contributions would have a pot of £1,198 today. If that same money had been saved in cash earning 2% a year it would be worth £668 today.
“Alternatively, someone who got two £500 contributions from the government (at birth and again on their 7th birthday) invested in the FTSE 100 would have £2,397 today or £1,336 if it was invested in cash earning 2%.”
But if their parents had added to the government vouchers over the years, 18-year-olds could be sitting on a decent pot of money now.
According to AJ Bell, someone who got the two £250 government contributions but whose parents had added £100 a month since birth and invested it in the FTSE 100 would have accumulated about £33,564. The same sums invested in cash earning 2% would be worth £25,163.
However, the Covid-19 market downturn may have reduced returns for many. Research by Interactive Investor found that parents who invested the £250 in vouchers in the FTSE All-Share index in January 2005 and contributed £100 a month thereafter would have experienced a £6,112 loss since the end of 2019 (£33,052 at 31 December 2020 versus £26,940 by 31 July 2020).
Young people accessing their money have to the choice to cash it in, transfer the funds to an ISA or do nothing.
Cash it in
If you have a CTF and want the cash, you can ask your CTF provider to hand over the money and get it paid into your current account.
If you do this you’ll lose the tax perks of the CTF, but for most people their personal savings allowance and capital gains tax allowance will be enough to protect any gains from tax in the short-term.
Transfer it to an ISA
Another option is to transfer the money into an ISA.
Any transfers won’t count towards the annual ISA subscription, so that means whatever sum you transfer you’ll still be able to add up to £20,000 into your ISAs in total in the current tax year.
However, any transfers to a Lifetime ISA will count towards the £4,000 annual limit.
If you don’t take any action, your CTF provider will either transfer the money to an ISA, if it offers one, or it will transfer it into a ‘protected account’.
If the money is in a protected account it still won’t incur income or capital gains tax and it will sit until the account holder does something with it.
What should first-time investors do?
If you want to keep the money saved, the account you pick will depend on what you plan to use the money for. If you know that you’ll need the money in the next five years you’re probably better sticking to cash.
If you want to keep it saved and plan to use it to buy your first property in the future you could opt for a Lifetime ISA. The government will add 25% to whatever you contribute, up to £4,000 each year.
“If you know you won’t need the money for the next five years or so but you’re not sure what you plan to use it for, then you could transfer it into a stocks and shares ISA and potentially earn higher returns than a cash ISA by investing it,” says Suter, “By keeping it in an ISA you won’t pay income or capital gains tax on the money but you’ll have a wide choice of investments.”
If you don’t feel confident picking where to invest you can defer asset allocation decisions to a professional. So-called ‘all in one’ funds spread your money between different countries’ stock markets and across various asset classes, such as bonds, gold and cash, depending on your risk appetite.