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Category: Savings Date: 8/3/2010
On 24 May 2010 the government announced plans to reduce, and then withdraw the contributions it makes to Child Trust Funds. Now you may be wondering what these changes are and how they will affect your child's fund. Check out Moneyfacts' guide to the changes.
Child Trust Funds are a type of savings or investment account for children. They are tax-free and may not be withdrawn from until the child is 18. In addition to any Government contributions made (please see below), you can pay in up to an additional £1,200 per year. When your child reaches 16, they start taking over responsibility for the account until they gain full control at the age of 18, when they can then make withdrawals or transfer the funds to another type of savings account or investment product. The Child Trust Fund can also be rolled over into an ISA, which preserves the fund's tax-free status.
At the moment the proposed changes are just that: proposals. They have to go through parliament before the rules come into effect. Therefore the "What currently happens" column will hold true until such time as the changes are approved. Any dates used in the table below are those used by the Government in their proposal. If the dates in question pass without the proposals having been approved by parliament, it means that the existing system is still in place.
What currently happens
What the Government propose to change (and when it will happen)
When your baby is born, the Government will send you a voucher worth £250 to open a Child Trust Fund (if your household is classed as a lower income household – in 2010/11 "lower income" is classed as at or below £16,190 – then your child receives an additional £250 as well). If you do not open a Child Trust Fund within 12 months of receiving the voucher, the Government opens a Child Trust Fund on your child's behalf. Please note that in order to be eligible for Government contributions to your child's Child Trust Fund, your child must be living in the UK, be eligible for Child Benefit and not be subject to any immigration restrictions.
For Children born on or after 3 August 2010. The £250 Government contribution will reduce to £50 (£100 for those children from lower income families). If the rules are not in force by 2 August your child will receive the existing £250 or £500, the new rules will then only apply to children born on or after the first Monday after they are approved by parliament. For Children born on or after 1 January 2011. The Government will make no contribution to your child's Child Trust Fund. If these rules are not in force by this date, you will receive a Child Trust Fund voucher from the government as normal. They will only take effect once this change has been approved by parliament.
On your child's seventh birthday the Government will pay a further £250 into your child's Child Trust Fund Account.
For children who turn seven on or after 1 August 2010. The Government will make no contribution to your child's Child Trust Fund. If these rules are not in force by this date, you will receive a Child Trust Fund voucher from the government as normal. They will only take effect once this change has been approved by parliament.
If your child is disabled and eligible for Disability Living Allowance, from April 2010 they will have received an extra annual contribution to their Child Trust Fund of £100 or £200, dependent on the severity of their disability.
From the tax year 2011/12 these payments will stop completely.
Your child's Child Trust Fund can receive up to £1,200 per year tax-free in contributions from family and friends.
This is unchanged.
No. The Government will honour any vouchers already issued – you have 12 months to open an account. If you do not open a Child Trust Fund within 12 months, the Government will still open one on your child's behalf. The Government will not take back any vouchers already issued, nor those for any children born before the date the new rules come into force.
Yes, providing your child doesn't turn seven after the rules are approved by parliament.
This one is a bit trickier to answer. In terms of the Government's proposals no, they are restricted only to the Government's contribution to your child's Child Trust Fund. The Government will not withdraw any contributions already made to your child's Child Trust Fund. However, if your child is not yet seven, it could mean that they don't receive the top-up payment and if your child is disabled, the additional £100 or £200 annual contribution will stop in the tax year 2011/12.
That said you can still contribute yourselves into the fund, up to a maximum of £1,200 per year. Child Trust Funds will also remain tax-free, and the money is still inaccessible until your child turns 18. Your child's Child Trust Fund remains transferrable to other Child Trust Fund providers, but not to any other type of savings account, again until your child is 18.
Why this is trickier to answer is because it's difficult to say how Child Trust Fund providers will react. Whether Child Trust Funds become less competitive as a consequence remains to be seen. Or maybe Child Trust Fund transfers will become more competitive instead? The key thing in the months and years ahead is to stay on top of the rate your child's Child Trust Fund is receiving, and transfer to another Child Trust Fund provider if you feel you're not getting the best return. If Child Trust Funds all become less competitive in general when compared to other savings accounts available to children, consider investing any new top-up contributions your family and friends may have into a top paying Children's Savings Account.
If you want to provide your child with a savings pot that will benefit them in the even longer term, more and more people are choosing to start early and set up a pension for their child. Granted the money isn't accessible for a long time – under current rules not until your child is 55 (and this age is likely to increase as life expectancies continue to rise) – but starting a pension will give your investment in your child's future a long time to grow. Talk to an Independent Financial Adviser to discuss your options.
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