Child trust funds explained

There’s little more fulfilling than investing money for the future financial benefit of your children. In the UK, if your child was born between 1st September 2002 and 2nd January 2011, they may have a savings pot set aside for them in the form of a child trust fund. On this page, you’ll learn more about child trust funds, how they work and what you can do if your child has a child trust fund.

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The rundown
  • The government set up child trust funds for children born in the UK between 1st September 2002 and 2nd January 2011
  • Child trust funds are tax-free and locked in until the child turns 18
  • Parents, grandparents or guardians can pay up to £4,260 a year into a child trust fund, and, in the current year 2020/21, up to £9,000

What is a child trust fund?

A child trust fund is a long-term children’s savings account set up by the government for children born in the UK between 1st September 2002 and 2nd January 2011. Parents of children born during this time would have received a payment voucher with instructions to set up the trust fund on behalf of the child. If they failed to do so within a year of receiving the voucher, HMRC would have done this on their behalf. There are three different types of child trust funds, which are covered below. 

How do child trust funds work?

When a child was born between the dates specified above, HMRC sent a one-off payment voucher to the child’s parent/s or guardian/s. The value of these vouchers was £250, or £500 for those on a low income. You could use this voucher to set up a child trust fund account in the child’s name, which matures on their eighteenth birthday.

Once the trust fund was open, parents, guardians, or grandparents could make additional contributions of up to £4,260 a year. For the year 2020/2021, these contributions have increased to up to £9,000. If you aren’t able to contribute the full amount, you can’t carry over the remaining allowance to the following tax year. The financial year for child trust funds runs from the child’s birthday each year. 

All the money saved in a child trust fund account belongs to the child and remains locked in until the child turns 18. When the child turns 16, they can legally take over the responsibility of the account and may make certain decisions about the fund. These include switching the account to another provider or transferring it to a Junior ISA. Once the child reaches 18 years old, they can access their trust fund and withdraw their money.

Does the government still provide child trust funds?

Child trust funds were discontinued by the government in January 2011 and were replaced by Junior ISAs. The government doesn’t contribute to Junior ISAs, which means your child will only receive the money that you or other contributors deposit into their account.

Different types of child trust funds

The voucher sent by the HMRC upon the birth of a child offered the choice of three account types, which were:

1. Cash Child Trust Fund

Cash child trust funds work like traditional bank accounts, in that they enable you to make deposits and earn tax-free interest.

2. Stakeholder Child Trust Fund

This type of child trust fund invests money saved into a mix of stock investments with set rules designed to lower the investment risk. These rules often include the money being gradually moved to lower risk investments when the child reaches the age of 13 and a cap on annual charges. This account is charged based on the value of the fund and has a maximum cap of 1.5% a year.

A child would have a stakeholder child trust fund opened by HMRC on their behalf if their parent/s or guardian/s did not elect to open an account within a year of receiving the voucher. 

3. Shares-based Child Trust Fund

This type of fund invests all the money in shares but doesn’t have the protection that a stakeholder trust fund provides. The provider of this type of trust fund will invest your money in the stock market by using funds of your choice, or you can make your own investments.

How do I find my child’s trust fund and who should I contact?

There are a huge number of cases where child trust funds have been lost. You could lose your child’s trust fund because the HMRC set up the account on the parent’s behalf if the parent wasn’t able to open the account themselves, the parents have forgotten about the account or moved to a different address without updating their information. 

The good news is that it’s easy to locate lost child trust funds even if you don’t know who the provider is. All you need to do is visit the UK government website and complete the HMRC form. Before completing the form, you’ll need a government gateway user ID and password, which you can also create through the website. 

Once complete, HMRC will send you details of your child trust fund provider by post, which usually takes up to three weeks after they have received your request.

Do child trust funds affect benefits?

No, investing in a child trust fund doesn’t affect benefits or tax credits, as you don’t pay tax on the income or any profit the account makes.

Why did child trust funds close?

There are several reasons why child trust funds closed. When the government introduced Junior ISAs, the interest rates earned on child trust funds fell, while Junior ISAs offered more competitive rates. Additionally, the charges for investments were also high compared to Junior ISAs, which also provide better benefits.

I have a child trust fund and I’m over 18. What should I do with the money?

There are many options available for the money you earn from your child trust fund. The bottom line is, it’s entirely your choice and will depend on your financial situation and savings goals.

If you want to continue growing your savings, you might want to consider a fixed rate bond. A fixed rate bond is a type of lump sum savings account that provides competitive interest rates if you lock your money away, typically for between six months and five years. The longer you can lock your money away for, the more interest you’re likely to earn.

If you want to quickly and easily open a fixed rate bond that can help you grow your savings and provide a secure return on your investment, register for a Raisin UK Account and apply today.

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