Next month, the first of the UK’s “child trust fund babies” will turn 18, kicking off a multibillion-pound payout to an estimated 5.5 million or more young people.
From September until January 2029, roughly 55,000 high school students will receive a windfall each month.
Child trust funds, also known as “baby bonds,” were introduced in 2005 and then abandoned a decade later. However, they have continued to accrue interest and are now coming of age.
The oldest children will be legally able to access their inheritance as of September 1. The youngest recipients, at age nine and a half, still have quite a while to wait.
In excess of 6.3 million CTF accounts were created, making this a massive initiative. With the option to move funds from a CTF to a Junior Isa available to all account holders as of 2015, it is likely that the total number of CTF accounts has decreased since then. However, it is believed that there is around £9bn in CTFs.
Just how much could they possibly gain? Fewer than one hundred pounds is a possible outcome for the minority of children who received the minimum government contribution and received no additional funding. On the other extreme are the tens of thousands of dollar accounts.
However, this number is more likely to be in the hundreds, if not the thousands, for the vast majority of people.
Since the coronavirus has wreaked havoc on the finances of millions of people, the maturation of their funds in the coming months will come as a welcome relief, providing an opportunity to save for college, pay for driving lessons or a gap year, or simply indulge in a whim. The money could be invested by someone else.
However, many young people won’t realise they have a CTF account set up in their name. Some parents may have moved or forgotten about their children’s presents because they were opened so long ago. A third of the total number of accounts may be “lost,” according to some estimates.
Introduction to CTFs
Children could put money away in tax-free savings accounts called “child trust funds” for the long term. Gordon Brown, who was then the United Kingdom’s chancellor, introduced them in 2005, with the first set of benefits applying to children born in 2002. To celebrate the arrival of each child born between September 1, 2002, and January 2, 2011, the government “endowed” each of them with a sum of money. Average recipients received £250, while those from the poorest families received £500.
Additional supplementary payments of £250 or £500 were made by the government to a few hundred thousand children whose seventh birthday occurred between September 1, 2009 and July 31, 2010.
To cut costs, it was decided in 2010 to do away with CTFs. No child born on or after January 2, 2011, is eligible for the government’s cash handouts, which were eliminated or reduced on July 31, 2010. They had to settle for a Junior Isa, which did not qualify for any tax breaks.
However, existing trust funds were allowed to remain in place. Plus, many people topped off their bottles with help from their friends and family.
The money in a CTF belongs to the child, but they can’t access it until they turn 18. At that point, they can use the funds however they like, including further investment.
In what ballpark should we estimate this?
Approximately £9 billion is held in CTFs; this includes approximately £3.3 billion from the government, £2.5 billion in contributions from family and friends, and approximately £3 billion in investment growth, according to Gavin Oldham, founder of the charity The Share Foundation.
Where do people stand in terms of payouts, if any?
The range is extremely broad. Which type of fund was used, how much money was contributed by family and friends, and how much money the government put in (which varied from £50 to £1,000, depending on age and family income).
Almost eighty percent are “stakeholder” CTFs, where the majority of the holdings are stock. CTFs linked to checking or savings accounts followed closely behind.
Imagine a person who was given two checks for £250, one upon birth and another upon reaching the age of seven. In this case, the funds were invested in the FTSE 100 index without any additional capital being added. AJ Bell’s personal finance analyst Laura Suter estimates that their savings would be worth around $1,198 on August 14 of this year.
She also notes that the sum would be worth £668 today if it had been invested at a rate of 2% per year.
If the same person had received two government contributions of £500 each and invested them in the FTSE 100, they would now have £2,397, compared to £1,336 if the money had been placed in a cash CTF paying 2%.
Some kids who are about to turn 18 could be sitting on a nice nest egg if their parents had also contributed to the fund over the years. Anyone who received the two £250 government contributions and had their parents add £100 per month since birth and invest it in the FTSE 100 would be in for a nice surprise of £33,564.
However, there have been substantial differences in the returns on different types of funds. Moneyfacts, a financial information provider, and Lipper, a research firm, examined the current value of the stakeholder funds based on a single £250 investment made in April 2005. One of the best performing banks was Santander, where £250 became £579. (the value on 14 August).
Investors’ capital appreciation trust funds (CTFs) at F&C Investments (now BMO) and The Share Centre are cited as examples of other firms that have performed admirably.
The HSBC stakeholder CTF, in contrast, only raised £403.
Earlier this month, OneFamily, which calls itself the largest CTF provider in the UK because it manages one in four accounts, reported that the average balance in its clients’ accounts was £2,079.
About 4,500 of Nationwide Building Society’s cash CTF accounts mature every month, making it one of the most active financial institutions in the market. Those with a maturity date within the next six months have an average balance of £2,311. This, however, rises to an average of £5,263 for those who have been contributing regularly in addition to investing the initial voucher.
For over two-thirds (69%) of CTFs that will mature in the next six months, Nationwide found that no additional funds had been set aside beyond the initial voucher. The remaining 31% had deposits made on their behalf by family members or other third parties, though not all of these people regularly saved.
Where your money may have gone missing and how to find it again
In cases where parents or guardians did not open a CTF account within a year of receiving the payment voucher, HM Revenue & Customs did so as a stakeholder. Overall, over 1.8 million “Revenue-allocated” accounts were created. Additionally, it is estimated that hundreds of thousands of CTFs have been marked as “addressee gone away.”
This means that many children will be eligible for a sum of money that they are currently overlooking.
The good news is that assistance is available if you are under the age of 18 and either your parents or guardian/caregiver have no idea which provider your CTF is with.
The Share Foundation has collaborated with the government to provide a free account-locating service for young people. You can fill out a short form to report a CTF at findctf.sharefound.org. This is then sent on to the relevant section of HMRC.