Life After Child Trust Funds
The £250 or £500 child trust fund voucher, paid upon registering a child's birth, was a way for parents to begin saving for their child.
The additional payment on the child's 7th birthday was a boost to this savings account. Since the 1st August 2010, parents will no longer get the full amount from the government upon their child's birth and 7th birthday. Under the new government, each child born between 1st August 2010 and 31st December 2010 will receive just £50 or £100, depending on the level of family income. After the 1st January 2011, all payments will be stopped. Any child turning 7 after the 1st August 2010 will receive nothing.
So where does this leave parents who still wish to save for their child? In this article, I'll answer a few questions that you may have regarding the trust fund, and alternatives available.
Why has the CTF been scrapped?Doing away with the Child Trust Fund is part of the Government's bid to pull Britain out of economic crisis. It's been estimated that the CTF cost the country £300 million each year.
I have a voucher, but haven't yet opened the account. Is it too late?No, as long as the account is opened before the expiry date on the voucher (a year after your child's date of birth). If you don't manage to open an account by that date, the Government will still open one for you, but the rates may not be as competitive.
I already have a CTF, what will happen to it?Nothing. Any active trust fund accounts will remain open and able to receive deposits up to the current limit of £1,200 per tax year. However, you won't get the additional 7th year payout if your child is not yet 7.
My child isn't due until next year - what are my savings options?Two advantages of the child trust fund were the tax free savings, which were inaccessible for a long period of time. Fortunately, there are other accounts available which give similar benefits, although none lock the money away for as long as the CTF.
Alternatives to the Child Trust Fund
Individual Savings AccountsIf tax-free savings is your priority, then a stocks & shares or cash ISA is a good option. Since a person needs to be 18 in order to have an ISA (16 for a cash ISA), the account will need to be opened in the parent's name. An ISA has a yearly deposit limit of £10,200, up to half of which can be in a cash ISA. Regardless of income or total savings, interest paid on an ISA is not subject to tax.
Children's Savings AccountsA CSA is just what the name implies - a savings account designed for children. Like adult savings accounts, a CSA comes in different 'flavours': regular deposit, fixed term, and easy access. Some banks also offer children's accounts with 'freebies' - gifts for the child when they open an account. These free gifts can be anything from a money box to vouchers for a day out.
Children's Savings PlanA CSP is not a savings account as such, but rather an investment portfolio geared towards the children's market. If you have knowledge of the stock market then one of these could be a good option for you. Essentially there are three types of CSP, Investment and Unit trusts, and Tax Exempt Savings Plans. The latter has a maximum yearly deposit limit of £270, and a minimum fixed no-withdrawal term of 10 years. They can also run alongside an existing CTF, and similar to the CTF, your child has to be over 16 to withdraw from them.
Final NoteAs with all bank accounts and other money products, your best approach is to do as much research as you can to find the best interest rates for the type of account which will suit your needs. A savings calculator is a handy tool to help you compare accounts, as it will tell you how a given interest rate will perform.
Louise is a parent in the UK who has made it her mission to tell people of the alternatives to child trust funds. She currently works for Moneysupermarket and also writes for a number of financial and parenting websites.