A Child Trust Fund is a long-term, Government implemented savings account for your child.
Only the child can withdraw the money when they reach 18.
Parents, family and friends can pay into the account and neither, parents or child will pay tax on income in the account.
Added Incentives
Since 06th April 2005, the Government sent out vouchers of £250 per child for everyone receiving child benefit that would qualify to open an account.
Children born after the 6th April 2005 will be given extra money to compensate for the loss of growth of the savings since the introduction of the scheme in 2002.
If you have not received your voucher you may request one by calling 0845 302 1470, or 00 44 1355 359002 (from abroad).
Alternatively, if you have received but lost your voucher you may request a replacement voucher.
For families on low incomes (threshold of £16,040 2009/2010) receiving Child Tax Credits (CTC), an additional £250 may be awarded.
This will not be sent as a voucher to the parents, it will be put in the CTF by HMRC when CTC have been awarded.
On the child's 7th birthday a further£250 will be awarded and paid directly into the CTF account; and for families claiming CTS's, another £250 on top.
As long as the income is under the threshold to qualify for CTC, it does not matter if CTC have been underpaid or overpaid.
The Government have stated that a possible third payment by them will be made in the secondary education period of the child; however, no decision has yet been made.
Additional Contributions into the CTF
Each year, parents, family and friends can pay up to a maximum of £1200 into the account.
If the maximum payments in a year are not made, the balance cannot be carried forward to the following year.
There are many different providers licensed by the Government to use a CTF product that can set up a CTF, but you can only do so if you have the voucher sent to you by HMRC.
It is recommended to choose an Independent Financial Advisor who will not be tied to specific products. You can find an unbiased list of regulated advisors here.
Does your child qualify?
- The child has been born on or after 1 September 2002
- Born between 1/09/02 and 5/04/05 had to be living in the UK on or after 6/04/05
- Is not the subject of immigration control
- Receives child benefit payments
- Children who are in care and the caring organisation does not receive child benefit for that child, the child will still qualify for a CTF
Children Abroad
- A child that has lived abroad but returns to the UK and child benefit is being paid will be eligible but will not qualify for the first and second payments from the Government.
- If a child has a CTF and then moves abroad, friends and relatives in the UK can still contribute up to £1200 a year, but the Government will not pay into the scheme as the child is not eligible for child benefit. The child may still withdraw the money at 18 years old.
The Voucher
When you receive the voucher you need to check that the details are correct on it.
If there are any errors then call 0845 302 1470, or 00 44 1355 359002 (from abroad) to rectify them.
Each voucher has a unique reference number (URN); you need to make a note of this for any future reference needed.
When you open a CTF with a provider they will need all the details on the voucher.
The voucher has an expiry date (12 months) printed on it and if you do not use it by that date, the Government will open a stakeholder CTF automatically for you and send you details of the provider.
If this occurs, you will need to apply to HMRC to be the registered contact, otherwise you will not be able to manage the CTF or change the provider. When the child reaches the age of 16 they may apply become the registered contact and then have the power to manage the CTF.
Death and Terminal illness
If a child is terminally ill, special arrangements will ensure that the child will get paid the money before they reach the age of 18.
If a child dies before the age of 18, the money will be paid out to the parents.
The Different CTF's
There are three types of accounts available:
1) Savings account
2) Stakeholder (Tracker or Non-Tracker)
3) Account that invest in shares
Choosing an account that best suits the needs depends on what level of risk you are prepared to take.
Savings Account
A savings account is a safe investment.
All the money invested in the account will be paid out with added interest.
The account may not grow as quickly or in value of that of the other options; but the money is guaranteed.
You are usually charged a fixed amount by the provider to open and manage the account.
Stakeholder Account
A stakeholder account is where the money is invested into shares into multiple companies.
This is not as risky as investing into normal shares as Government has set special rules.
When the child reaches 13 years old, the money is invested into lower risk shares in companies.
There is a 1.5% upper limit that a provider may charge for opening and managing the account (this does not apply to the other two options).
Shares Account
An account that invests into shares is the riskier option of all three.
Shares are invested into companies and dividends are paid.
Remember share value can rise as well as fall, but in general can level out over an 18 year period yielding good returns.
The provider usually charges a % on return (profits) to open and manage the account.
There are many providers in the market charging varying rates, it is wise to do your homework and compare several providers.
You may want to be forearmed with questions you should consider asking a prospective advisor.
HMRC have a tool that may help you to choose which product best suits your need.
People choosing an account that invests into shares may wish to choose 'Ethical' companies that do not trade in arms, ammunition, tobacco or alcohol.
There are also 'Shari'a accounts that take Islamic values into consideration.
You will need to ask your provider for details of companies who support these.
Contributing into the CTF Account
The contributions year of the CTF runs from the child's birth date.
In each year from that date you can contribute up to £1,200.
If it is a stakeholder account, a minimum of £10 has to be contributed each year; payments can be made by cheque, direct debit, standing order and direct credit.
Paying terms into the other account types are set out by the provider.
Managing the CTF Account
The registered contact is the only person who is able to manage the account (the child when they reach 16 years and make an application to manage their account).
Each year you registered contact will receive an annual statement from the provider detailing income, contributions and charges.
It is important to be proactive in managing the account.
If you don't keep track (with the exception of a savings account) of what is happening then you could fall foul and make financial losses.
If you see that the investments are not performing as you would like you have the option of changing accounts or providers.
Remember to keep your provider up to date of any changes such as address of the account contact. HMRC have a useful FAQS page which you can see here.
The Downside
It seems unethical almost to pick fault when the Government are contributing up to £1,000 free, over the course of the 18 years; but we have to be impartial.
Pause for thought-
- Whereas your beautiful toddler might be an angel; she or he could turn out to be a monster at 18 and use the money for things that you would not approve of, possibly even drugs.
Remember, nobody except the child has control over how the money in the account is spent.
Only they can withdraw it, and, from 16 years old they can make decisions about the way the account is managed, if they want to.
So, if you are planning to build a nest egg for example, a college fund, think again and may be look for an alternative solution.
- The scheme was designed and implemented by the Government. Whereas they cannot take their cash contribution back, they could amend the rules that govern how the scheme runs.