Child Trust Fund

A Child Trust Fund (CTF) was a long-term, tax-efficient savings and investment account for children in the United Kingdom. Launched in 2005, this government-led initiative was designed to ensure that every eligible child had a nest egg waiting for them when they turned 18. The scheme was open to children born between 1 September 2002 and 2 January 2011. To kickstart the savings, the government provided an initial voucher of at least £250 to open the account. While the CTF scheme was discontinued in 2011 and replaced by the Junior ISA (JISA), millions of these accounts still exist, holding billions of pounds. As the eligible children reach adulthood, these funds are maturing, making it crucial for families to understand what they are, how they work, and what to do with them.

The CTF was a simple but powerful idea: give children a financial head start, courtesy of the state, and encourage families to save for their future.

The process began with a voucher sent from HM Revenue & Customs (HMRC).

• Most children received a £250 voucher.
• Children from lower-income families received a £500 voucher.
• An additional top-up payment was made when the child turned seven.

If parents didn't open an account within a year, HMRC would open a default stakeholder account on the child's behalf, ensuring no one missed out.

Once opened, anyone—parents, grandparents, friends—could contribute to the CTF, up to an annual limit. All contributions and any growth on the investments were completely free of UK income and capital gains tax. The money was locked away until the child’s 18th birthday, instilling a discipline of long-term savings. From the age of 16, the child could take over the management of the account, but still couldn't make withdrawals.

Parents had three main options for where to place the money:

• Shares-based CTFs: Invested in the stock market through funds, trackers, or individual stocks. This offered the highest potential for growth but also came with higher risk.
• Stakeholder CTFs: The most common type. These were also shares-based but had a set of rules, including capped management fees (at 1.5% per year) and a gradual de-risking of the portfolio as the child neared 18.
• Cash CTFs: Essentially a tax-free savings account, offering interest payments with no market risk.

The CTF scheme was closed to new applicants in 2011 as a cost-cutting measure. It was immediately replaced by the Junior Individual Savings Account (JISA). The JISA works in a very similar way—it's a tax-free wrapper for a child's savings—but with one key difference: there is no government contribution. However, the JISA market is far more competitive, often offering a wider selection of investments and, most importantly, lower fees.

Millions of CTFs, some potentially forgotten, are now maturing. Here’s what you need to know.

It's surprisingly common for families to have lost track of their CTF. If you think your child has one but you don't have the details, you can find it using the free tracing tool on the HMRC website.

Since 2015, it has been possible to transfer a CTF to a Junior ISA. For many, this is a very smart move.

• Why Transfer to a Junior ISA?
  1. More Choice: JISAs offer access to a vast universe of investment options, including thousands of funds, investment trusts, and equities, far beyond the limited choice of most CTF providers.
  2. Lower Fees: This is the big one for any savvy investor. JISA providers often have much lower annual fees than the 1.5% cap on stakeholder CTFs. Over 18 years, a difference of 1% in fees can have a colossal impact on the final pot of money due to the power of compounding.
  3. Simplicity: If you have other children with JISAs, transferring the CTF can bring all the family's child savings under one roof with a single provider.

When the child turns 18, the CTF “matures.” The money and the decisions are now legally theirs. The funds don't just land in their bank account; to preserve the tax-free status, the provider will typically roll the CTF into an adult ISA or a similar protected account. The new adult can then choose to:

• Cash it all in.
• Leave it invested to continue growing tax-free.
• Transfer it to a different ISA, like a Lifetime ISA, to save for a first home.

The CTF, despite its discontinuation, offers timeless lessons for investors everywhere.

• The Eighth Wonder of the World: The CTF is a perfect case study in compounding. A small sum, invested early and left to grow for 18 years, can become a substantial amount. It underscores the core value investing principle that time in the market is one of an investor's greatest assets.
• Fees are a Tyrant: A value investor is allergic to unnecessary costs. The potential to switch from a high-fee CTF to a low-cost JISA is a no-brainer. Lowering your investment costs is one of the few free lunches in finance, directly boosting your net returns over the long haul.
• An Educational Tool: The CTF provides a golden opportunity to teach young adults about finance. When they gain control at 16 or full access at 18, it’s the perfect moment to discuss the difference between saving and investing, risk, diversification, and the virtue of patience. For American investors, this is the same principle that applies to a Custodial Account (UGMA/UTMA) or a 529 plan. The goal is not just to hand over money, but to impart wisdom. It's an investment in their financial literacy that will pay dividends for the rest of their lives.