When prompted to think about social experiments and savings, there’s probably few who would hold up child trust funds (CTFs) as a resounding success.
CTFs were established to help kick-start the savings habits of children born between 1 September 2002 and 2 January 2011.
The government originally handed parents a voucher for £250 to start the fund (£500 for parents on low incomes), with a further payment at age seven for the early accounts.
Although no new accounts have been issued for the last eight years, parents and others can still add up to £4,368 a year into the accounts.
The income generated from payments made by a parent into a CTF is not taxable under the parental settlements rules. The income and investment growth in the CTF are also not subject to income tax or capital gains tax.
Up to age 16, the person with parental control makes the decisions about the CTF. This can pass to the child at age 16 if they request it. When they reach age 18, the fund can be paid out to them tax-free, and they can decide what to spend it on.
The first of these accounts will mature in September 2020. If they have been invested well and topped up regularly, some of them could be worth tens of thousands of pounds.
In last year’s Budget, the government promised it would consult on draft regulations on maturing CTFs this year, but we have yet to see these emerge from a Brexit-stymied Whitehall.
CTFs were then overtaken by the introduction of the more modern Junior Isa (Jisa).
Although a child cannot hold a CTF and a Jisa at the same time, CTFs can now be transferred into a Jisa. And there are many reasons why parents – and older children – may want to consider moving away from the defunct savings plan.
For example, some CTF providers may not have been taking such good care of the product. Transferring from a CTF to a Jisa might open up a wider investment range not available in the CTF. Charges in a Jisa may also be lower, which could make a significant difference to the value of the fund on maturity.
This is, however, a one-way decision.
Once the transfer is made to the Jisa, the funds cannot be transferred back to the CTF, although it can be transferred on to another Jisa. Care should also be taken to find out if there are any exit penalties on transfer.
Although six million CTF accounts were set up, there’s about one million lying dormant, which have received no further payments since the government’s original feeder funding.
Even if the paperwork has been lost, these forgotten accounts can be tracked down by parents using the online tool from HM Revenue & Customs.
With a growing emphasis on intergenerational planning, parents, grandparents and other family members may want to dust down these dormant – and other more active – CTFs.
It may be worth considering if they are the right solution to passing on wealth, or whether they may benefit from being transferred to a more modern product.