Child Trust Fund

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A Child Trust Fund (CTF) is a long-term savings or investment account for children in the United Kingdom. The UK Government introduced the Child Trust Fund with the aim of ensuring every child has savings at the age of 18, helping children get into the habit of saving whilst teaching them the benefits of saving and helping them understand personal finance.

Eligible children receive an initial subscription from the government in the form of a voucher for at least £250.

Contents

[edit] Eligibility

Every child born on or after 1 September 2002 is eligible for the CTF, as long as:

  • child benefit has been awarded for them;
  • they are living in the United Kingdom; and
  • they are not subject to immigration controls

The children of Crown servants posted abroad – including the Armed Forces – qualify because they are treated as being in the UK.

[edit] Types of CTF

Most advisers recommend equity-based CTFs, and the fact accounts allocated by HM Revenue and Customs are put into stakeholder products indicates that the government also believes equities are the best option over such a long period.

[edit] Stakeholder account

Stakeholder accounts invest in shares, with a set of rules ("stakeholder standards") to reduce financial risk. These include provision for money in the account being gradually moved to lower risk investments or assets when the child reaches age 13. This is to help to produce a stable return in the run up to the child's 18th birthday.

The charge on a stakeholder account is limited to no more than 1.5 per cent a year, whereas charges on all other types of CTF account are not limited in this way.

[edit] Savings account

These operate in a similar way to a bank deposit account; there is a rate of interest and the nominal value of the funds is secure.

[edit] Non-stakeholder account

Invests funds according to the type of product. These accounts are not protected by the "stakeholder standards".

[edit] Transfer of providers

CTF funds can be transferred between providers. Rules for transfers are similar to those for Individual Savings Accounts – customers should inform the new provider they wish to use and they will undertake the move. No penalty or fee can be imposed for transferring the account, except for the cost of selling shares (such as dealing charges) in equity accounts.

[edit] Subscriptions

[edit] Government vouchers

  • At birth: The government gives every eligible child a voucher worth £250 to open the account, and also a further £250 directly into the accounts of children who live in low income families.
  • At age 7: The government will make an additional payment of £250 into the account, with a further £250 for children in low income families.
  • At age 11: The government is consulting on the possibility of a further voucher at this age.

If vouchers are not invested within one year of issue, HM Revenue and Customs will open a stakeholder account on behalf of the child.

[edit] Other funds

Parents and other family members or friends can pay an additional £1,200 a year into their child’s fund, on which any gains or dividends will be tax free (except for the 10% tax on UK share dividends). Stakeholder accounts cannot set the minimum contribution above £10, but the provider can set a lower minimum.

[edit] Tax treatment

All of the funds in the account are exempt from income tax and capital gains tax, including at maturity. However, the 10% dividend tax payable on franked income (UK share dividends) cannot be reclaimed.

[edit] Account management

CTFs will be managed by the parents/legal guardians of the child until the child reaches the age of 16. At this point, the child will have the option to take over management of the account including choice of provider and investment decisions. However, they will still not be able to withdraw funds from the account until reaching 18. The government has stated that they will be introducing a programme of education in personal finance in schools to enable 16-year-olds to competently manage their CTF.

[edit] Maturity

As the account belongs to the child when they turn 18, the money is theirs to use as they see fit. The UK government has stated that it will be possible to transfer the entire CTF into an ISA to keep the tax-free status of the investment. If the CTF is withdrawn as cash, the tax benefits will be permanently lost.

[edit] Article

[edit] Argument

Based on ideas of Bruce Ackerman and Michael Sherraden[1], Child Trust Funds are a form of asset-based egalitarianism.[2] According to the Institute of Public Policy Research:[3]

“ The wealthy have always relied on assets to smooth the path into adulthood, but now every single child will be able to do the same. The lumpy costs, the risky decision, and upfront investment involved in making ones way in life will be eased, whether that means spending money on training, starting a businesses - or simply buying the suit needed to attend an interview... CTFs recognise that assets, not just income, can bring security and opportunities. ”

Sherraden argued that possessing wealth in your early adulthood improves life outcomes by its effect of changing attitudes:

“ Income only maintains consumption, but assets change the way people interact with the world. With assets, people begin to think for the long term and pursue long-term goals. In other words, while income feeds peoples' stomachs, assets change their minds.[4] ”

Phil Willis of the Liberal Democrats said:

“ The child trust fund scheme should be abolished.... The scheme is expensive, unnecessary and locks up much needed resources, which could be better spent on ensuring life-long education... [T]he child trust fund may mean some cash in their pockets but they will still have missed out on the chance of a life changing education.[5] ”

[edit] See also

[edit] External links