Child Trust Funds: What should your child be doing with their money and what lessons can you pass on?

Category: News

Launched in 2005 for children born after 1 September 2002, the first recipients of a Child Trust Fund (CTF) reach aged 18 in 2020.

With potential payouts ranging from below £500 to more than £5,000 for a lucky 8%, your child or grandchild could have some important decisions to make.

If a loved one is due to receive a payout from their CTF, what should they be doing with their money, and what financial advice can you pass on?

The history of CTFs

In 2005, the government introduced a new way for parents to provide a nest egg for their children, as well as providing them with a financial boost at the age of 18. Every parent that opted to open a CTF received a £250 voucher from the government, rising to £500 for low-income families.

Although only parents or legal guardians could open the funds, anyone was free to pay into it. An annual allowance, originally set at £1,200 allowed grandparents, family, and friends to contribute up to that limit.

In the years that followed, the limit increased and it now runs in line with a Junior ISA (JISA). That means for the 2020/21 tax year, the limit stands at £9,000.

JISAs replaced CTFs for children born after 2 January 2011 but any CTF you hold is still valid.

What should your child do with their CTF payout?

The value of your child’s fund will depend on the amount paid in and the type of CTF you opted for. But the Institute for Fiscal Studies recently researched the CTFs taken out during the first year of their availability.

They confirm that nearly a quarter (23%) will have more than £1,000 and a lucky 8% could receive more than £5,000.

However much your child is about to receive, it’s important they use the money wisely. Here are some ways it might be used:

  • For university – Whether for food, accommodation, or books, the cost of three years at university soon adds up. A CTF payout could give a child the additional safety net they need.
  • Keep it invested – if your child doesn’t take their CTF payout, the product will convert to an adult ISA. ISAs are tax-efficient and with a subscription limit of £20,000, your child could begin adding to their investment as soon as they are earning.
  • Towards the deposit on a first house – A Lifetime ISA allows those between 19 and 39 to save for a first home, while seeing their investment topped up by 25% from the government, up to a maximum of £1,000 a year.
  • Spend it – if your child is considering a gap year before university it might prove enough to fund at least some of the trip (once worldwide travel becomes a viable option again). It could be a one-off opportunity to gain valuable life experience.

3 lessons to remember

It’s never too early to visit a financial planner, or to receive financial advice. Whatever your child decides to do with their money, there are some financial basics that you can remind them of.

1. Budgeting

Keeping track of incomings and outgoings will help your child or grandchild identify areas where they can make savings. It can also help to keep a focus on financial issues and prevent them from forming bad spending habits.

2. The importance of an emergency fund

No one knows what is just around the corner. That’s why preparing for the unexpected is so important and plays a large part in all the financial advice we give you. Recommend that your child or grandchild builds an emergency fund whose value equals at least three to six months’ worth of living expenses.

Remember that your child doesn’t need to build this level of emergency fund overnight. Factored into a budget, it can become a realistic and achievable goal.

3. The need for a cooling-off period before making purchases

Having a monthly budget will help your child engage with their finances.

Having a goal each month, or for the longer term, should help prevent bad spending habits forming. But it’s always worth remembering the value of a cooling-off period. Ask your child three questions when they’re making a purchase:

  • Can they afford it?
  • Are they buying something they need or something they want?
  • If they wait 24 to 48 hours will they still want to make the purchase?

Whatever your child opts to do with their CTF payout, simple financial advice can make all the difference and good practice from a young age can be habit-forming.

Get in touch

If you’d like to discuss an impending CTF payout, or you would like more general financial advice about money matters or saving for a child, get in touch. Please email or call 020 8891 0711.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.