"Young people are still being hit hard by the measures taken to combat Covid-19 and, if they invest it wisely, this money could provide them with a real boost in an otherwise uncertain future."
From 1 September the first young people to have benefited from Child Trust Funds (CTFs) will begin to turn 18 and be able to access their money. The chief executive of one of the country’s oldest mutually owned investment businesses is urging them to think carefully before doing so.
Peter Green (pictured), chief executive of the friendly society Healthy Investment, said, “When the beneficiaries of CTFs turn 18 their accounts will automatically roll over into adult ISAs or, if their provider isn’t authorised to offer ISAs, an account with equivalent tax-free status. I would strongly suggest that they keep their money there, or transfer it into another ISA.
“It will obviously be tempting for young people to splurge this money, particularly after what they have gone through during lockdown, but I urge them to think about how it could benefit them when they really need it – for example when putting down a deposit on a house or moving to a new city for a job. There is also a simple question of timing – most CTFs are invested in funds that track the performance of the stock market, which, although nobody can predict the future, seems unlikely to hit any historic highs in late 2020.”
Child Trust Funds were one of the flagship policies of the former Chancellor of the Exchequer Gordon Brown, and were intended to help improve social mobility by giving all children a nest egg. The government issued the parents of all children born in the UK between 1 September 2002 and 3 January 2011 with CTF vouchers worth between £250 and £500.
CTFs were discontinued by the Coalition Government in 2011 and replaced by Junior ISAs (JISAs) which, like CTFs, are free from capital gains tax and income tax. These can be more flexible than CFTs but do not benefit from an initial government cash injection.
The beneficiaries of CTFs can take control of their accounts from the age of 16, at which point they can choose a new provider, transfer their CTF into a JISA or switch their investments into different funds. They cannot, however, withdraw their money before the age of 18.
As recently as this spring it was unclear what would happen when CTFs matured, with the default position having been that these accounts would “cash out”. However, the Government has since confirmed that CTFs will now automatically convert either to adult ISAs or “HMRC Protected Accounts”, which share most of the features of ISAs but cannot accept additional deposits.
Although many CTFs have seen no additional contributions over and above the government voucher, a significant number have received additional investments from parents and grandparents. In some cases large balances have been built up.
Mr Green continued, “Whether your CTF is worth hundreds or thousands of pounds, it is important to think how this money could help you in the future, and how it might benefit from continued growth until then. Young people are still being hit hard by the measures taken to combat Covid-19 and, if they invest it wisely, this money could provide them with a real boost in an otherwise uncertain future.”
CTFs held with Healthy Investment will automatically transfer into the Healthy Investment All-Share ISA on the beneficiary’s 18th birthday. These ISAs are invested in a fund that tracks the performance of the FTSE All-Share Index.
Holders of these ISAs can, if they wish, transfer their money into Healthy Investment’s Ethical With-Profits Fund. This holds back a proportion of investment returns in years of strong performance to “smooth” out the losses that might otherwise be experienced during years of weaker markets.
Mr Green said, “Moving into our with-profits fund could be particularly appropriate if, for example, someone was planning to put down a deposit to rent a flat, or to buy a car to start their first job, and didn’t want to risk not being able to do so because their investments had taken a big hit during a stock market slump.”
The Healthy Investment All-Share ISA into which maturing CTFs will convert, and its with-profits equivalent, will accept additional contributions up to the annual adult ISA subscription limit. Partial withdrawals of at least £50 will also be permitted, provided a minimum balance of £50 remains in the account.