The first of the UK’s “child trust fund babies” turn 18 next month, triggering the start of a multibillion-pound payout to an estimated 5.5 million-plus young people.
Starting from September the windfalls will run all the way through until January 2029, with about 55,000 teenagers each month becoming entitled to a pot of cash with their name on it.
Launched back in 2005, child trust funds – or “baby bonds” – were scrapped a decade ago, but they have been quietly ticking away in the background ever since, and they are finally coming of age.
From 1 September the oldest children will turn 18 and be able to access their money. The very last people to get payouts are currently only aged nine and a half, so they have a long wait.
It’s a huge programme: more than 6.3m CTF accounts were opened. Since 2015, anyone with money in a CTF has been able to transfer it to a Junior Isa, so that number will have come down a little bit. Nevertheless, there is estimated to be about £9bn locked up in CTFs.
So how much might people get? For a small minority of youngsters who received the lowest possible government contribution and then had nothing added, they might be looking at less than £100. At the other end, there are accounts worth tens of thousands.
For many, though, it is likely to be several hundred, or perhaps, a couple of thousand.
Coronavirus has caused havoc with millions of people’s finances, so for many of those whose funds mature in the coming months, this windfall couldn’t have come at a better time – money to put towards university, to pay for driving lessons or fund a gap year – or simply splurge on something frivolous. Others may want to invest the cash.
But many youngsters will be unaware that there is a CTF account in their name. After all, they were opened a long time ago and some parents will have simply forgotten about it and possibly moved house. Some estimate that these “lost” accounts could make up a third of the total.
CTFs: the basics
Child trust funds were long-term tax-free savings accounts for children. The then chancellor, Gordon Brown, launched them in 2005, backdating the first to youngsters born in 2002. Every child born between 1 September 2002 and 2 January 2011 was awarded a cash “endowment”. For most, the payment was £250, with £500 to those from the poorest families.
A few hundred thousand kids (those whose seventh birthday fell between 1 September 2009 and 31 July 2010) also received a top-up payment from the government – again either £250 or £500.
In 2010 it was announced that CTFs would be scrapped to save money. The government cash handouts were stopped or reduced after 31 July 2010, and no child born after 2 January 2011 was entitled to one. They had to make do with a Junior Isa, which didn’t offer a government incentive.
But, crucially, the trust funds already in existence were allowed to continue. And family and friends were able to carry on topping up, which many did.
With a CTF, the money belongs to the child, though they can only take it out when they are 18 – at which point they can spend it on whatever they want, or reinvest it.
How much money are we talking about?
The approximately £9bn locked up in CTFs is made up of around £3.3bn that the government coughed up, £2.5bn in contributions added by family and friends, and £3bn or so of investment growth, says Gavin Oldham, founder of charity The Share Foundation.
What sort of payouts will people get?
This will vary hugely. It all depends on how much cash the government contributed – this ranged from just £50 all the way up to £1,000, depending on date of birth and family income – plus how much (if any) was added by family and friends, and what type of fund the money went into.
Almost 80% of the accounts are so-called “stakeholder” CTFs, where the money is predominantly invested in shares. Cash savings account CTFs were the next most popular.
Let’s take someone who got two payments of £250, one at birth and another on their seventh birthday. This money was invested in the FTSE 100 index, but no further contributions were made. They would have a pot worth about £1,198 on 14 August this year, says Laura Suter, personal finance analyst at investment platform AJ Bell.
If that same money had been put into a cash account earning 2% a year, it would be worth £668 today, she adds.
Alternatively, someone who received two £500 contributions from the government and invested them in the FTSE 100, would now have £2,397, or £1,336 if it had gone into a cash CTF paying 2%.
If parents had also paid money in over the years, some soon-to-be-18-year-olds could be sitting on a very decent pot. Someone who got the two £250 government contributions but whose parents have added £100 a month since birth and invested it in the FTSE 100, would have a windfall of £33,564 heading their way.
But there have been big variations in fund performance. Investment Life & Pensions Moneyfacts and research firm Lipper looked at how much some of the stakeholder funds are now worth, based on a single £250 investment in April 2005. They found that one of the best performers has been Santander’s, which has turned £250 into £579 (the value on 14 August).
They say other decent performers include F&C Investments (now rebranded BMO) and The Share Centre, whose stakeholder CTFs have grown to £557 and £545 respectively.
By contrast, HSBC’s stakeholder CTF managed only £403.
OneFamily, which describes itself as the UK’s largest CTF provider – it looks after one in four accounts – said earlier this month that its average account value was £2,079.
Nationwide building society was a big player in the market, and each month will see about 4,500 of its cash CTF accounts reach maturity. It says the average balance of those due to mature in the next six months is £2,311. However, it adds: “This increases to an average of £5,263 for those that have been topping up, rather than just investing the initial voucher.”
Of those CTFs due to mature in the next six months, Nationwide found that with more than two-thirds (69%), nothing more had been saved beyond the initial voucher. In the case of the remaining 31%, parents etc made some form of deposit, though not all saved regularly.
‘Lost’ accounts – and how to be reunited with your cash
If a child’s parents or guardian failed to open a CTF account within a year of having received the payment voucher, HM Revenue & Customs opened a stakeholder CTF on their behalf. More than 1.8m “Revenue-allocated” accounts ended up being opened. On top of that, there are thought to be several hundred thousand CTFs classed as “addressee gone away”.
All this means that for many youngsters there will be a pot of cash out there that they are unaware of.
But the good news is that if you are perhaps 16 or 17, and your parents or guardian/carer don’t know which provider your CTF is with, help is at hand.
The Share Foundation has been working with the government to help young people find their accounts, and runs a free-to-use search service. Go to findctf.sharefound.org and you will find a simple form you can fill in. This is then forwarded to a special department at HMRC.
HMRC has also created an online tool to help young people find out where their account is held. Go to gov.uk/child-trust-funds/find-a-child-trust-fund