Child Trust Funds abolished, what now?

Posted on June 2nd, 2010 | Categories - Savings

Child Trust Funds (CTF’s) were one of the first casualties of the government’s spending cuts. We take a look at what this means for future savings and existing CTFs.

What are CTFs?

They were launched in January 2005 and are savings and investment accounts designed to encourage parents to save for their children.

Children born on or after 1 September 2002 received a £250 voucher to start their account, and a further £250 voucher at age seven, additionally, children in families with low incomes would have received an extra payment from the Government.

The account belongs to the child and can’t be touched until they turn 18, so that children have some money behind them to start their adult life.

The CTF can then be topped up by the child’s parent or other members of the family, to a maximum of £1,200 per annum.

The voucher and any top ups could be invested in either a deposit account or in a fund linked to stocks and shares.

When will they be abolished?

The removal of new CTFs will be phased in.

From August 1st 2010 new parents will receive only a £50 voucher, although lower income families will receive £100.

The additional payment for seven year olds will be halted from August 1st 2010.

From January 1st 2011 no new vouchers will be issued.

How much will this cost a child?

Not only will the child lose out on the £500 payment plus any extra payments due to the family being classed as having a low income, but growth on the money that would have been invested will also be lost

What about existing CTFs?

No changes will be made to these and parents need to take no action.

Furthermore top up payments, up to the annual maximum of £1,200 can still be paid into existing accounts.

The growth on CTFs will still be tax free and is therefore an attractive option if a CTF is already in existence.

Where should we invest for our children now?

Firstly you have to consider whether you want the investment to be held in your name or the name of your child.

As children cannot own shares or collective investment funds if you want the money to be held in your child’s name a deposit account is one of the few options that you have. A wide range of accounts are available, the Halifax Children’s Regular Saver account currently offers an interest rate of 6% gross per annum and is at the top of our best buy tables, which can be found here.

Be careful though when looking at deposit accounts aimed at children not to be taken in by high headline rates that drop soon after taking the accounts out, regularly check that the rate offered initially is still competitive.

If you want to invest in stocks or shares, possibly via a collective investment fund, these will need to be held in the name of an adult and could be held in an ISA for increased tax efficiency.

Contact us here at Investment Sense to discuss your requirements in more detail.

Leave a Reply