Child trust funds: Should you trust your teenager with their financial future?
On the surface, a product that is designed to encourage parents to save money for their children sounds ideal. But child trust funds (CTFs) are riddled with problems.
The first CTFs reached maturity at the beginning of this month, potentially giving some 16-year-olds partial control over a big pot of cash.
Introduced by the then chancellor Gordon Brown back in 2005, any child born between 1 September 2002 and 2 January 2011 was eligible for this now defunct savings product. CTFs were later replaced by junior Isas in 2011 – for good reason, as we’ll see.
Originally, the maximum amount you could pay in was £1,200 per year, but this subscription increased gradually, and jumped to £4,260 in April for existing accounts – meaning some funds could accumulate savings amounting to tens of thousands of pounds (particularly as some are investment CTFs which include shares).
While teenagers can’t actually access the cash until they are 18, their sixteenth birthday marks when they become responsible for this account – giving them the option to transfer the money to a different account or select an investment strategy.
But, for those of us who remember being 16, the thought of a horde of teenagers making their own investment decisions might set alarm bells ringing. Very few youngsters are likely to see the sense in investing money for the long term, or have the right knowledge to do so effectively.
The problem is that many young people are not educated about finance, which is why the CTF maturity might be more of a concern than a celebration. And as Sarah Phillips, a tax partner at Irwin Mitchell Private Wealth, warns, “for many parents, the worry will be that their child will fritter away the fund as their first taste of freedom.”
It is particularly concerning when this money has the potential to make a huge difference to their child’s adult life, helping them get on the housing ladder, start a business, or even just generally provide a financial cushion.
Phillips recommends that parents have a conversation with their kids now to prevent them from making any risky decisions when they officially become adults at 18. A discussion doesn’t have to involve financial advice – but it’s worth asking what your kids plan to do with the money, and perhaps give them some pointers on the best way to invest. “Learning how to make these sensible decisions will give them valuable experience for passing down further wealth in the future, like lifetime gifts or inheritance on death.”
Other than offering an opportunity to have a financial chat with your child, CTFs were a misguided idea from the outset, and not just because they assumed that 16-year-olds are more financially savvy than they are. Initially, the account offered each child two measly £250 freebies from the government (which is possibly why take-up was so poor).
The other problem is that many of these accounts have been lost – with figures from the Share Foundation charity suggesting that around £1.5bn is missing after family members lost track of the account information.
If you’re one of the few to have saved religiously into a CTF over the years, it’s worth considering moving the money into a junior Isa instead. These are slightly more sensible in that they give kids control of the money at 18 (when they are, hopefully, a tad wiser). They also tend to have a broader range of investment options, as well as better interest rates.
The bottom line is: if your sprog is coming up to their sixteenth birthday, now is probably a good time to chat about their financial future. You might sound like a party-pooper, but your kids will thank you for it later.