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. We also explore the alternatives to child trust funds, such as junior ISAs and fixed rate bonds.

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.

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. The contribution limit was increased to £9,000 from 6 April 2020 onwards and anyone, including family and friends, can now make contributions into the account.  

If you aren’t able to contribute the full amount, you can’t carry over the remaining allowance to the following tax year. Any money held in a child trust fund is tax-free and doesn’t affect the parent or guardian’s entitlement to benefits or tax credits.

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 (more on this below). Once the child reaches 18 years old, they can access their trust fund and withdraw their money.

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.

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.

There are a huge number of cases where child trust funds have been lost. You could lose your child’s trust fund because 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.

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. Scrapping them was also considered an austerity measure. 

However, it’s worth noting that junior ISAs aren’t the only option available if you want to save for the children in your life. You might want to look at competitive savings accounts or fixed rate bonds, which may provide better returns.

Many people have opted to transfer their child trust fund to a junior ISA due to the more generous interest rates on offer. However, it’s important to note that you can’t have a child trust fund and a junior ISA at the same time, so you’ll have to convert the former to the latter.

If you do decide to switch your child trust fund, be sure to compare a range of junior ISAs to find the most competitive rate and the best option for your needs. Once you’ve found a provider you want to switch to, you’ll first need to check that they accept transfers (most junior ISA accounts do). 

To make the switch, simply contact the new provider and request a transfer. You’ll have to complete a transfer form with details of the child trust fund account but the provider will handle the move from there onwards.

Once you’ve transferred a child trust fund to a junior ISA you can’t switch back, so it’s important to make sure you’re happy with your decision before you proceed.

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.