Child Trust Fund – investing for the future
FEBRUARY 3RD, 2010 By DAVID
We are often asked by clients to recommend investments for children and grandchildren. The starting point when considering investments for children is the Child Trust Fund (CTF), which is a tax efficient long term savings plan.
CTFs have been available since 6 April 2005 and apply to all children resident in the UK born from 1 September 2002. The main features of CTFs are:
• Normally opened by a parent or guardian who will be responsible for managing the plan until the child is age 16
• The Government contributes £250 to each CTF at birth and a further £250 at age seven (children in low income families may receive a further £250)
• The maximum that can be contributed to a CFT each year (between a child’s birthday) is £1,200 from all contributors e.g. parents, grandparents etc
• Unused allowances cannot be carried forward
• No UK tax on income and capitals gains
• Parental settlement rules do not apply
• Cannot be accessed until the child reaches age 18, although the child can make investment decisions from age 16 and the provider can be changed at anytime
• On the child’s 18th birthday, the CTF will cease and the child will be able to access the money. If the money is not taken then it can be rolled over into an Individual Savings Account (ISA)
There are three types of CFT available:
• A savings account CTF which is essentially a deposit account
• A stakeholder CTF which invests in shares and must meet certain Government standards on charges, payment options and minimum contributions. Once a child reaches age 13, a stakeholder CTF will gradually switch into less risky investments
• A non-stakeholder CTF which invests in shares. Non-stakeholder CTFs generally have greater investment choice and are not subject to the Government standards on charges, payment options and minimum contributions.
As well as providing a lump sum at age 18, which can be used to pay for higher education costs, CTFs should hopefully introduce children to the concept of saving and the benefits associated with it.
Whilst CTFs should form the foundation of any investment planning, there will be some children who are not eligible for a CTF (because they were born prior to 1 September 2002) or whose parents already contribute the maximum each year to a CTF. For these children, there are a number of alternative plans such as regular saver bank/building society savings accounts and lump sum/regular saver investment plans.
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