Child trust funds: a windfall at 18 – but what should you do next?

At some point in the midst of 2009 I made a decision that would change my son’s life: I started paying £10 a month into his child trust fund account.

It didn’t seem like much but, almost 18 years later, thanks to the performance of the stock market and the original government payment, he’s about to get about £10,000. At first he had no idea what to do next, financially, and he’s not alone.

All children born between 1 September 2002 and 2 January 2011 have a child trust fund (CTF), thanks to a scheme launched by the Labour government in 2005. Gordon Brown, then chancellor, aimed to close the asset gap and boost financial literacy among young people. All parents were sent an investment voucher for, typically, £250 (£500 for low-income families), and if they didn’t put it in a savings or investment account by their child’s first birthday, the government did it for them.

Parents and carers could then opt to pay in more until the child turned 18, with current rules allowing payments of up to £9,000 a year. From age 16 the child can take over managing the account, and as soon as they turn 18, the fund matures and the money is theirs. At this point they can take out the money or transfer it into an adult Isa.

There is no doubt that the scheme is of huge value, but many teens don’t understand what to do with their windfall, and some do not even know that they have a CTF. For many, this is the first big decision they will have to make about money.

Lost accounts

Gavin Oldham runs the Share Foundation (sharefound.org), which supports financial literacy in teens and helps reunite young people with their CTF money.

“We’ve connected 121,000 young people with their accounts for free, but there’s £1bn of CTF money that belongs to low-income young adults that’s not been claimed,” says Oldham. “It’s bigger than the Post Office scandal – more people are affected.”

Lost details, provider mergers and changes of address are all cited as barriers to claiming funds. Oldham thinks HM Revenue and Customs could do more to reunite people with their money using national insurance numbers and the PAYE system.

“There is a risk of young people walking away because of the complexity of it,” he says. “There has to be a mechanism for releasing the funds when the beneficiary reaches adulthood.”

Moxxie, 19, from Bath, didn’t know he had a CTF until a few months before he turned 18, and found tracking it down difficult.

“My parents didn’t have the details. I had to call someone – they told me how to log in. I had to wait for a code in the post [but] it didn’t work, so I had to do it again,” he says. “It took a couple of months going in circles. Some people might just give up.”

His parents had not paid into the fund, and he received “a few hundred pounds”.

Foresters, a provider which runs almost 400,000 CTFs, has an outreach programme to educate young people.

“We go to schools and colleges to talk to about it,” says Nici Audhlam-Gardiner, chief executive of Foresters UK. “At one school, only half the year group knew about CTFs. We have lobbied the government to take responsibility for this work.”

Audhlam-Gardiner says the less involved parents were with the scheme, the less likely young people are to reinvest the money when they get to 18.

“We promoted the scheme from day one. Our advisers did face-to-face financial meetings and would give parents indications of what the funds could grow into,” she says. “If parents are interested, young people will take it seriously when they turn 18.”

Like Moxxie, George, 18, from Bristol, found he had an account worth a few hundred pounds, and had other money he had saved.

“My parents had forgotten about it,” he says. He saw a news article and asked his mother, who found the details for him.

“I’m good at saving money, so I withdrew my CTF and put it in my savings account,” he says. “I get 3.1% on the first £1,000 and 1.15% after.”

George says that “dealing with money is quite foreign. We’ve not talked about it much at school. They talk about saving money, but not what to do with it. If I was more clued up, I might have invested it.”

‘I didn’t know what to do’

Polly, an 18-year-old art student from South Gloucestershire, also put her CTF money in her bank account because she says it felt preferable to investing the cash.

“I was excited that my CTF was almost £1,000, but I didn’t know what to do next,” she says. “There were some options on the website, but they didn’t really explain what they were, so I just withdrew it. I feel more comfortable knowing it is in the bank because I understand what that means.”

Gina Miller, from MoneyShe, an investment platform that also focuses on financial literacy, is worried that young people are missing out because of the “advice gap” – not knowing where to get guidance.

“It’s the first real money they’ve ever had – that’s an exciting thing. The worst thing they could do is leave it in a bank account,” says Miller. “They need to be beating inflation. Otherwise, it’s like having a slow puncture: the money will keep decreasing in value.”

Foresters offers an interactive dashboard for account holders so that young people can see their fund and how it performs, and there is a button to book a free appointment with a financial adviser.

Moxxie spent his CTF because he didn’t think he had enough to invest, but Miller encourages clients to start with any sum.

“Young people have time on their side – even a small amount can grow into a nest egg because of the magic of compounding. Even better if you add to it over time,” she says. “It’s a foundation, and learning good habits for the future.”

‘It’s great to feel in control’

Jack from Buckinghamshire, found out he was getting £33,000 a few weeks before his 18th birthday. He says he felt overwhelmed. Luckily, his mother has a friend who is a financial adviser.

“She sat me down and talked me through the different options, including a partial withdrawal. I decided to take £1,000 out to go on holiday with my mates, and reinvest the rest.”

Jack says knowing he could take some money out to spend made him feel in control.

“I couldn’t have made those decisions without help, though. I didn’t understand the benefit to me to keep investing it. Some of my mates have gone on crazy holidays or bought things they don’t need. There should be programmes to help you understand investing.”

Polly says: “I definitely think the CTF should be reintroduced, with a practical skills programme to help support young people understand finances and investments. It’s made me think about learning to save and look after my own money.”

Oldham says he has put a proposal forward to the government that suggests bringing in another version of the scheme.

“The child trust fund scheme is an important strategy for intergenerational financial rebalancing. We’ve learned so many lessons, and we can do it better next time round,” he says.

When I started paying into my son’s account CTF, I hoped it would cover the cost of university. He doesn’t have enough for that, and would rather get a job anyway. When I told him how much the fund was worth, his first thought was: “How many guitars can I buy with £10k?”

But after we suggested that we would continue to pay £10 a month into it if he reinvested the money, he is planning to take out a lifetime Isa. I like the idea that it could turn into a deposit for a house and feel that “2009 me” deserves a pat on the back for a good parenting decision.

The options at 18

You don’t have to make a decision at 18. On your 18th birthday your CTF matures. You can’t pay any more money in, but you can leave it where it is and make a decision later. Until the child withdraws or transfers the money, it stays in an account that no one else has access to.

Partial withdrawals are a thing. For example, you can take some of the money out and spend it on something nice, and reinvest the rest with a different investment or savings provider.

You can move the money into an Isa. When a CTF account has matured you can transfer the sum into an adult Isa.

What if it’s a child under 18? Since 2015, anyone with money in a CTF has been able to transfer the fund to a junior Isa. For many youngsters, that will probably be the wisest thing to do as they will usually be able to get a better return.

Consider a lifetime Isa. For the time being, you can take out a lifetime Isa and use it to save for your first home or for later life. You can put in up to £4,000 a year, and the government will add a 25% bonus to your savings, up to a maximum of £1,000 a year. So that’s £1 added for every £4 invested toward a house deposit or retirement.