What to do when your Child Trust Fund matures

Some children turning 18 this year will have access to hundreds or even thousands of pounds if they hold a Child Trust Fund (CTF). Over six million CTF accounts were opened before 2011, when the Government scheme was replaced by Junior ISAs. Those whose accounts are yet to mature can find out more on what to do with their funds below.

CTFs were a Government initiative to encourage parents and guardians to save towards their children’s future. After the Government’s initial deposit of £250 or £500, further additions of up to £9,000 each year could be added to the account tax-free. Every child born between 1 September 2002 and 2 January 2011 was eligible for a CTF, and they could access their funds when the account matured on their 18th birthday. 

Although it can be tempting to spend the money saved in your CTF, it may be better to use the money to continue saving for the future. For example, there could be a house deposit or tuition fees to consider. Every individual is different, and their individual savings goals will require different investment strategies.

Savers who are certain that they want to use the money in their CTF to help towards a house deposit may want to consider opening a Lifetime ISA (LISA). A LISA allows savers to deposit up to £4,000 each tax year, with the Government topping up the account with a 25% bonus. This means that those able to save a total of £4,000 each year could receive a Government bonus of £1,000, as well as benefiting from interest or dividends added to their savings.

The main drawback with LISAs is that the money saved can only be used towards a house deposit on a first home or retirement. If money is withdrawn from a LISA for any other reason, there is a 25% penalty on the amount withdrawn. This not only wipes out the Government’s contribution, but also some of the money originally saved into the account.

For more information about these accounts, and to see if you qualify for this Government scheme, read our guide on LISAs.

Those who want to save their money at a guaranteed rate of interest will have to withdraw or transfer the money into another savings account. When looking at which type of account to open, savers need to consider whether they want to continue making savings deposits and if they might need to access their money.

An easy access savings account is likely to be the best option for those who want to continue saving into the account and make withdrawals. However, it is key to remember that savers pay for this flexibility as easy access accounts usually offer the lowest saving rates.

For those who will not need to access their money, a fixed rate bond could be the best option. These savings accounts require savers to lock their money into the account for a pre-determined fixed rate period. In return for not being able to access their money, these accounts usually offer more competitive savings rates.

A longer-term fixed-rate bond could be a great option for those going to university who know they will have to pay back a student loan in a couple of years.

Likewise, it is also important to remember that interest earned on savings accounts is taxable. This can eat into your profits so, for a tax-free alternative, it may be worth considering your ISA allowance.

In essence your ISA allowance allows you to invest up to £20,000 each year tax-free. However, for cash ISAs, this generally comes at a price. Typically, cash ISAs offer lower rates than their savings counterparts.

If you are prepared to take on more risk, you could invest in a stocks & shares ISA. This typically offers more risk than a savings account or a cash ISA, as your initial capital is not guaranteed and can lose value over time. So, for taking on this risk, there is the potential to earn more than a traditional savings account.

Those who are interested in investing their funds can also do so outside of their ISA allowance. However, you may be subject to other forms of taxation such as Capital Gains Tax. 

Those who will be investing in the stock market independently can consider using an investment platform. Hargreaves Lansdown, interactive investor, and eToro all allow their users to invest in a variety of stocks, Exchange Traded Funds (ETFs) and other investment funds.

Importantly, when deciding which platform is best for you, investors should always consider what types of fees and commissions are involved before making a final decision.

Alternatively, it may be worthwhile to seek independent financial advice when deciding if this is the best option.

Those who want to find a comfortable balance of risk in their portfolio can invest their Child Trust Fund proceeds into both a savings and investment fund. To find this perfect balance, and to ensure it is on track to achieve your savings goals, we recommend you speak to our preferred financial advisers Kellands Hale.