Targeted as 'unnecessary expenditure' by the government’s deficit reduction plan, Child Trust Funds look set to be on their way out. But what does this mean for your child's savings? We explain.
Child Trust Funds have now closed to new applicants and have been replaced by Junior ISAs, read our guide: Child Trust Funds: An Update for more information.
Child Trust Funds (CTFs) are long term, government-incentivised saving and investment accounts made available to all children born since September, 2002.
They were introduced to encourage young people to save for their future and enabled friends and family to save up to £1,200 a year for the child tax free.
Child Trust Funds also receive contributions from the government; with £250 being added on account opening (£500 for children of low income families) and a further £250 added when the child reaches 7 years of age.
Are Child Trust Funds being scrapped?
Unfortunately, the answer is yes; it looks very likely that Child Trust Funds are on their way out. Chancellor George Osborne announced plans to phase them out as part of the new government's deficit reduction plan. This is contingent on him getting the relevant legislation pushed through parliament, but with expected (and much needed) savings of £320million this tax year alone it is likely to get approved.
How & when will this happen?
The government's contributions to Child Trust Funds will be reduced from August 2010 and then stopped completely in January 2011. The changes are as follows:
- CTF contributions will be reduced from £250 to £50 for children born after August 2010 (£100 for children of lower income families)
- Additional CFT contributions made when a child reaches 7 years of age will be stopped from August 2010
- CTF contributions will be stopped for all children born on or after 1st January, 2011
Child Trust Fund contributions will continue to be provided and accounts run as they are now until August, 2010.
What will happen to existing Child Trust Fund accounts?
If you have already opened a Child Trust Fund for your child it will still operate as it does now until they reach the age of 18.
You will not be able to access the money until then, but family and friends can still contribute up to £1,200 a year towards your child's savings tax free. You will also be able to move your child's Child Trust Fund account to a different account provider at any time during its term.
If your child turns 7 before August, 2010 they will still receive the additional £250 government contribution. However, if they turn 7 after August, 2010 they will not qualify for this extra payment.
Your children will not, at any time, be asked to give back the money the government has contributed to their savings through the Child Trust Fund scheme.
What if I haven't yet opened a CTF for my child?
Child Trust Funds will continue to be issued at their current level (£250 or £500 depending on household income) until August 2010. Thereafter vouchers for the lesser amount (£50 or £100) will be made available until the scheme is stopped completely on 1st January, 2011.
Vouchers will remain valid until their expiry date (so you will still be able to open a Child Trust Fund for your child) and HMRC will continue to open accounts for children whose parents have not done so prior to this.
After 1st January, 2011 HMRC will stop issuing new Child Trust Fund vouchers. You will not be able to open a Child Trust Fund account without a valid, in date voucher after this.
