Is your teen ready for their Child Trust Fund?

If your son or daughter has just celebrated their 16th birthday, an extra dose of congratulations may be in order.

Anyone who has turned 16 since the start of September 2018 may potentially have reached an additional landmark – namely, they have become owners, in the eyes of the law, of the first wave of Child Trust Funds.

Child Trust Funds were officially introduced by the Labour government in 2005. But the savings scheme was backdated to cover all children who had been born after the end of August 2002.


Twin attractions

Originally, Child Trust Funds had a double appeal. As well as the benefits of tax-efficient saving, with no tax to pay on interest income or capital gains, funds received an initial government contribution of £250 or £500. It was intended that a further payment would be made when the child turned seven, but only a small number of funds received this extra contribution before the scheme was reformed in 2010.

Initially, the coalition government at the time decided to stop offering these payments at birth and age seven. But shortly afterwards Child Trust Funds were replaced by Junior ISAs.

The aim of introducing the Child Trust Fund scheme was to encourage parents to put money aside, on a regular basis if possible, for their children’s futures. In the future this could help cover the cost of university fees and living expenses, for example, or to use as part of a deposit on a first home.

As such, the money held in a Child Trust Fund can’t be withdrawn until the child in question reaches adulthood. But while the rules state that the money is not available until age 18, children have the legal right to take over the management of their funds. For example, making their own investment decisions – as soon as they turn 16.

Legal implications

In practice, this might not make a lot of difference to how accounts are being run – it seems unlikely that many 16-year-olds will decide to shake up how their money is being saved or invested. But it does present a valuable opportunity to parents whose children may now be just two years away from gaining access to a potentially sizeable amount of cash.

Child Trust Fund rules – and those applying to Junior ISAs – state that once the individual named on the account reaches the age of 18, the money is theirs to do with as they wish. So, if you’re a parent who has managed to amass hundreds or even thousands of pounds on your child’s behalf using a Child Trust Fund, now is the time to consider what is going to happen when they come into that money.

Perhaps the key question is:

“Does my son or daughter understand money well enough to look after this cash responsibly?"

If the answer is no, you may have as little as two years to put matters right. The good news is, the government has taken steps in recent years to increase the amount of financial education available in schools via the national curriculum. So, the chances are that your child has already learned some of the basics of money management – even if this just relates to budgeting, credit or how interest rates work, say.

What do they need to know?

In terms of helping youngsters learn how to handle a Child Trust Fund windfall, parents could focus on what is likely to have been the original purpose of the cash: to give their child a decent start in life.

So, it would be well worth discussing, for example, how the UK’s higher education system currently functions. University undergraduates typically facing little choice but to take on a significant amount of debt to finance their degree courses. Using at least some of the money held in a Child Trust Fund could help reduce the overall level of student debt, which may then result in a greater level of financial freedom when your child enters the world of work.

At the same time, you could explain the importance of saving for a deposit on a first home. Having an extra few thousand pounds to put down can mean that buyers have access to cheaper mortgage rates, as well as a greater range of properties to choose from.

Finally – and as an extra incentive to use Child Trust Fund money responsibly – you could also point out that this could mean your son or daughter will be able to move out of their parents’ home a good deal sooner than their peers.

Written by Chris Torney - Financial Journalist 


Note: Whilst we take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decision. The opinions expressed within this blog are those of the author and not necessarily of OneFamily.

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