What to do when your Child Trust Fund matures

What is a Child Trust Fund?

Child Trust Funds (CTFs) were a Government initiative to encourage parents and guardians to save towards their children’s future. After the Government’s initial deposit of up to £250 (or up to £500 for those on a low income), further additions of up to £9,000 each year could be added to the account tax-free.

Every child born between 1 September 2002 and 2 January 2011 was eligible for a CTF, and they could access their funds when the account matured on their 18th birthday.

The Child Trust Fund Scheme ended in 2011 and was replaced by Junior ISAs. However, with over six million CTF accounts opened before that time, a lot of children could still have funds tied up in them. Those whose accounts are yet to mature can find out more on what to do with their funds below.

How to access a Child Trust Fund

Money cannot be accessed from a CTF until the child turns 18, but they can manage the account themselves from the age of 16 if they choose. They’ll need to notify the CTF provider that they now want to be the ‘registered contact’ of the account; until that point, this would have been the parent or guardian.

Whoever is the registered contact will be able to manage the account, including things like deciding how the fund is invested, moving to another provider, or switching from a cash account to stocks and shares. However, the money still legally belongs to the child, and when they turn 18, they’ll be able to withdraw it.

What to do when a Child Trust Fund matures?

According to HMRC, the average CTF balance is around £2,200, which could make it a very nice birthday present! So, if you’re about to turn 18, you may be wondering what you should do with the money.

Every individual is different, but here are a few options you might want to consider.

Withdraw the money

Once you can access the money, you’re free to withdraw the money as you see fit and can transfer it directly into your current account.

However, although it can be tempting to spend it, it may be better to use it to continue saving for the future. For example, there could be a house deposit or tuition fees to consider, so you may want to transfer at least some of it to a separate savings account instead.

Savings account

Transferring it into another savings account means it can continue working hard for you, but when looking at which type of account to open, you’ll want to consider whether you want to keep making deposits and if you’ll need to access the money.

• An easy access savings account is likely to be the best option for those who want to continue saving and make withdrawals, and is the ideal home for an emergency fund.
• For those who won’t need to access their money, a fixed rate bond could be the best option. These accounts ask you to lock your money away for a set period, which could be a great way to make your nest egg grow even further. For example, a longer-term bond could be ideal for those going to university and will need to pay back a student loan in a few years.

Cash ISA

While interest earned from a standard savings account is taxable if you breach your Personal Savings Allowance (PSA), anything earned from a cash ISA is not. As such, it may be worth considering using your ISA allowance.

You’ll be able to invest up to £20,000 into an ISA each year, and returns are tax-free. Depending on how much you have in your CTF, and how much you’ve already contributed to an ISA in the current tax year, this means it could be the perfect home for your CTF savings.

Again, you can choose between more accessible or fixed rate versions.

Lifetime ISA

As another tax-free option, if you want to use the money in your CTF to help towards a house deposit, you may want to consider opening a Lifetime ISA (LISA).

A LISA allows savers to deposit up to £4,000 each tax year, with the Government topping up the account with a 25% bonus. This means you could receive a Government bonus of up to £1,000 per year, as well as benefiting from interest or dividends earned from your savings.

The main drawback with LISAs is that the money saved can only be used towards a house deposit on a first home or retirement. If money is withdrawn from a LISA for any other reason, there is a 25% penalty. This not only wipes out the Government’s contribution, but also some of the money originally saved into the account.

But, if you’re serious about saving for your first home, it could be the perfect solution.

Stocks & shares ISA

If you are prepared to take on more risk, you could invest in a stocks & shares ISA.

This is typically riskier than a savings account or a cash ISA, as returns are not guaranteed and you may end up with less than you put in. However, there is the potential to earn more than with a traditional savings account, so it’s all about balancing that risk.

What happens to my Child Trust Fund if I do nothing?

If you don’t tell your provider what you want to do with the money, it’ll simply be converted into a different account – this could be a Matured Child Trust Fund, or an adult cash ISA depending on the provider (or a stocks and shares ISA if you’ve got an investment CTF).

This is unless the provider doesn’t offer ISAs, in which case the money will be transferred into a tax-free HMRC-protected account, but you won’t be able to make any further deposits.

You could always leave your money in the default account, but it likely won’t offer the best rates.

Ideally, you’ll want to consider which type of savings account would be best for you, and compare the options to ensure you’re getting the best returns possible.