First CTFs come of age – what are the options for those turning 18?

Laura Suter
18 August 2020

•    September marks the first Child Trust Funds coming of age
•    800,000 child trust fund accounts set to mature
•    18-year-olds can cash-out, transfer to an ISA or do nothing

Laura Suter, personal finance analyst at investment platform AJ Bell, comments:

“From next month, anyone celebrating their 18th birthday could get a bonus birthday present as the first tranche of child trust funds mature. Child Trust Funds were available to children born between 1 September 2002 and 2 January 2011, so the first ones mature this year, and it’s estimated that around 800,000 of the accounts will mature each year. 

“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%.

“If parents had added to the Government voucher over the years, 18-year-olds could be sitting on a very decent pot of money today. 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 a windfall of £33,564 headed their way. Those same sums but invested in cash earning 2% would be worth £25,163.

“For lots of 18-year-olds this will be the first decent chunk of money they’ve been in charge of, so it might seem daunting – it might also seem tempting to splurge it all. But there are a number of options open to them, from saving it in cash to transferring it into an ISA and investing it.

“Too many child trust funds accounts have been lost, with an estimated one million accounts not being claimed by account holders. Often this is because people have moved house so no longer get the mail associated with the accounts or they’ve forgotten they even have the account. The Government has a tracing service online so you can find out if you have an account and who it’s with. 

What can you do with your Child Trust Fund?

1.    Cash it in: 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.

2.    Transfer it to an ISA: You can transfer it to an ISA, either cash, stocks and shares, innovative finance or lifetime. Any transfers won’t count towards the annual ISA subscription, so that means whatever sum you transfer you’ll still be able to put up to an additional £20,000 into your ISAs in total in the current tax year. Any transfers to a Lifetime ISA will count towards the £4,000 annual limit though.

3.    Do nothing: If you do nothing with the money your CTF provider will either transfer it to an ISA, if they offer one, or they’ll transfer it into a ‘protected account’, where 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. Moving it to a cash ISA means it will stay protected from income or capital gains tax. However, you’re not going to earn much interest on the money at the moment – the top rate easy-access cash ISA is from NS&I and pays 0.9% interest. 

“Alternatively, 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, as the Government will add 25% to whatever you contribute, up to £4,000. Currently if you want to access this money for anything other than your first home or retirement you’ll pay an exit charge of 20%, so just losing what the Government has added, but after April next year this will rise to 25% -- meaning the Lifetime ISA isn’t a great option if you want easy access to your money.

“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. 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. Assuming you have a pot of £1,000 and make no further contributions it would grow by £46 over the next five years if you picked the current top cash ISA paying 0.9%. However, if you invested it earning 5% a year after fees it would grow by £276 during that same five-year period. If you had received the larger pot of £33,500 then it would grow by £1,535 over five years if you kept it in cash or £9,256 if you invested it earning 5% a year.

“For many this will be their first foray into investing and so might seem daunting. If you don’t feel confident picking where to invest you can defer asset allocation decisions to a professional. You can buy so-called ‘all in one’ funds that spread your money between different country’s stock markets and across various asset classes, such as bonds, gold and cash, depending on your risk appetite. The Vanguard LifeStrategy funds are worth looking at and most investment platforms often offer their own versions too. 

“Alternatively, first-timers could buy a cheap ‘tracker’ fund, which mimics the performance of a broad global index, such as the MSCI World. Fidelity World Index is one option for this, which has a low annual cost of 0.12%. Once you’ve built up a pot of money you can add in active fund managers to get exposure to more specific areas of global stock markets. Before you do this you need to think about what countries and asset classes you want additional exposure to.”

* Performance figures correct to 14th August 2020.

Laura Suter
Personal Finance Analyst

Laura Suter is personal finance analyst at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.

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