Child trust funds explained – and how to track down a lost one

We explain everything you need to know about child trust funds and what to do if your child had one

Child trust funds explained
Child trust funds explained
(Image credit: Getty Images)

Thousands of teenagers could be missing out on millions of pounds in nest eggs that were opened for them, using child trust fund (CTFs), when they were babies. 

We take a look at what CTFs are, how to track down a lost one and what to do if its now maturing.

The first round of child trust funds (CTFs) matured on 1 September, 2020. CTFs are tax-free savings accounts held by those born between September 2002 and January 2011. Depending when the child was born – and whether it was a low-income family – the government paid in between £250 and £1,000 to the account. Relatives and friends were able to make extra contributions, and any interest or investment growth would have boosted the accounts. The average CTF is worth £1,500, according to official figures.

Teenagers can access their pots when they turn 18. However, an estimated 1 million of the total 6.3 million CTFs have been lost. The wealth manager Hargreaves Lansdown (opens in new tab) calculates that more than 114,000 teenagers who have already reached 18 could be completely in the dark about having a CTF and are collectively missing out on £171.4 million.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, remarks that “teenagers with a bad case of FOMO are going to be furious” if they have a missing nest egg.

As more and more youngsters celebrate their 18th birthdays, numerous TikTik videos and Instagram reels and posts have sprung up reminding teenagers that they can claim their government-funded pot of money – and if they don’t know where it is, how to track down a lost account.

What are child trust funds?

Child trust funds are tax-free savings accounts that were opened for babies born between 1 September 2002 and 2 January 2011. The aim was to give all children a nest egg by the time they reached 18.

The government paid in £250 when a child was born, and £250 when they turned seven. For low-income families, the two vouchers were worth £500 each.  

There were three types of child trust fund: cash (similar to a cash ISA), stakeholder (the money was invested in a set fund, with fees capped at 1.5% a year), and shares-based (the money could be held in different investments, with varying fees).

The scheme was scrapped in 2011. Junior ISAs replaced them – which didn’t include any government contribution – and parents were later allowed to switch a CTF into a junior ISA.

When can the money be accessed?

At age 16, the teenager can take control of the fund. They can change the investments, switch providers, and/or move their CTF into a junior ISA. But they can’t withdraw the money. This is only allowed when they turn 18. Of course, they don’t have to take the cash out. They could choose to move it to an adult ISA instead, or into another savings or investment vehicle. 

Should you move a CTF to a junior ISA?

CTFs and junior ISAs are very similar: they have the same allowance (family and friends can pay up to £9,000 into the accounts for the current 2021-22 tax year), and the same tax-free status. They both legally pass into the child’s ownership when they turn 18.

However, the main difference is the choice of investments and fees, and for the cash version, the interest rate on offer.

For cash CTFs, the only account accepting transfers in is Skipton Building Society’s child trust fund, according to the data provider Moneyfacts. It pays 2% interest. There is a lot more competition in the junior cash ISA market, with 34 products available. The best rate is 2.5%, from Bath, Darlington and Loughborough building societies. Tesco Bank and Coventry Building Society have junior ISAs paying 2.25%.

So, you may wish to transfer a cash CTF into a higher-interest cash junior ISA. Depending on how much is in the account, and how long there is to go until the youngster reaches age 18, switching to a junior ISA could add hundreds of extra pounds to the pot.

For an investment-based CTF, there could be even bigger benefits when moving to a cheaper junior ISA. 

Jason Hollands, managing director – corporate affairs, at the adviser Tilney, (opens in new tab) explains: “Around three-quarters of CTFs went into stakeholder funds, nearly all of which adopted the maximum capped charge of 1.5%. In most cases these were UK index tracker funds that mimic overall movements in the UK stock market. Unfortunately, 1.5% is eye-wateringly expensive for such strategies.” 

For example, in the Bestinvest junior ISA you can buy the Fidelity Index P fund, a tracker with a tiny 0.06% ongoing charge. Once you add the 0.4% junior ISA account fee, total annual costs of 0.406% are a whopping 73% lower than most stakeholder CTFs, according to Hollands.

The other reason to move is greater choice. Junior ISAs from platforms like Hargreaves Lansdown, Bestinvest, AJ Bell Youinvest and Interactive Investor have a huge range of funds, investment trusts and shares to choose from, across every market from around the globe.

If your child is 16 or over, they can choose the investments themselves, which will make them more engaged. They could pick shares in their favourite tech company, retailer or food firm, or research a handful of funds, from China or America-focused ones to property funds or gold funds. 

In doing so, your child will learn vital lessons about saving and investing, and hopefully be more likely to keep the money invested when they reach 18, or – at least – spend their cash more mindfully.

How to transfer a CTF to a junior ISA

It’s fairly simple to move to a junior ISA: decide which provider you wish to transfer to and ask them to send a transfer form (or download it from their website). Once you have filled in and returned it to the junior ISA provider, they will handle the process from there by contacting the CTF provider. This can take several weeks to complete.

Laura Suter, head of personal finance at the investment platform AJ Bell, has a few tips: “If you’re transferring a CTF you need to move over the entire sum of money to a junior ISA; you can’t have both types of account open at once. But helpfully the amount you transfer won’t count towards your annual junior ISA limit. This means you can transfer the entire CTF into a junior ISA this tax year and still add up to £9,000 to it.”

What should you do with a CTF at age 18?

CTF holders will currently be aged between 10 and 19. Eighteen and nineteen year olds can withdraw some or all of the cash and spend it as they please. Or, they can keep it untouched in a savings or investment account.

A cash CTF is normally transferred into a cash ISA, with the same true for stocks and shares versions. 

“There really is no need to do anything with this money immediately and I would encourage any 18 year old to resist the urge to splash out and spend it all,” says Hollands. “These financial war chests can help you get a head-start in life, so make small withdrawals if you need to, for example to help with university costs, but otherwise try and keep some of your money invested, where it will hopefully continue to grow and reap you rewards.”

While parents can be worried about their kids getting automatic access to their CTFs or junior ISAs at 18, it seems teenagers are often taking the sensible approach and keeping them invested. Just 7% of AJ Bell Youinvest junior ISA customers cashed all their money in when they reached 18.

Talking to your child about the nest egg as they near their 18th birthday is important. Suter notes: “It’s a good idea to have a discussion with them about what they might want to do with the money, whether they want to keep it saved for future or whether they have a sensible plan for it now. If they want to keep it saved, they can transfer it to an ISA, either cash, stocks and shares, innovative finance or lifetime. Any transfers won’t count towards the annual ISA subscription.”

A lifetime ISA (opens in new tab) could be a useful home for many CTFs, as they come with a top-up from the government. Anyone aged 18 to 39 can open one, and for every £4,000 saved each year, the government adds £1,000 of free cash (effectively a 25% bonus).

The catch is the lifetime ISA can only be used for two purposes, either to buy your first property, or at age 60 onwards. 

Coles says: “If you withdraw the money early for any other reason, you’ll pay a penalty, but if you want to buy a place of your own at least a year down the line, they’re a great way to get free money from the government.”

How to track a CTF down

A staggering 1 million CTFs are estimated to be lost. This could be because the parents or guardian failed to open an account when they received the first voucher and the government opened it for them, or because the family moved and didn’t keep in touch with the CTF provider.

You can track down your CTF through the government website (opens in new tab).

You need to sign into the Government Gateway, or sign up for an account. Then you fill out a form with your child’s details, and HM Revenue & Customs will send you details of the CTF provider by post within three weeks of receiving the request.

“Anyone can use the government checker to find their account. Unfortunately, it’s not a quick process, but it could prove lucrative,” comments Suter.

“Even if parents didn’t contribute anything extra to the funds, there could be a few hundred pounds sitting in the accounts from the government bonus alone. If the money has been invested for the past 18 years your child could have a much larger pot.” 

Ruth Emery is contributing editor at The Money Edit. Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.