How the Child Trust Fund works

The Child Trust Fund (CTF) scheme in the UK was part of the Labour Party’s platform in 2001, and was actually launched in 2005.  Initially the plan was for children born after 1 September, 2002 who were living in the UK, or whose parents were posted abroad by the government or the military, to receive a voucher worth £250 at birth, if they received Child Benefit.  When the child reached age seven, another government voucher for £250 was deposited.

Parents had the option of investing the funds in a selection of financial organisations including stakeholder accounts, shares accounts or savings accounts.  With stakeholder accounts, the money invested can fluctuate according to the value of the shares purchased, but it converts to cash before the trust matures.  With shares accounts the same fluctuations may occur, but there is no cash conversion prior to maturity.  Savings accounts are just that, with value based on fixed interest.

After the original funds have been invested in one or the other of the financial organisations, funds can be added by family or outside parties at any time, but not to exceed £1,200 in a year, and any gains or dividends are tax free, only excepting the 10% tax on share dividends.  When the child reaches the age of 18 the fund is turned over to him or her; no withdrawals by any party are allowed until that time.

Since it was first initiated, changes have been made to the CTF, but in May of 2010 the government announced that the age seven top-up would be discontinued as of August that year, and payments to newborns would cease as of the end of 2010.  As of current legislation, children born after January 2011 will not receive any government funds, and those born between August and December of 2010 will get reduced amounts.

Children born in the prescribed time slot, who have received the government vouchers, will still have the invested funds available on their 18th birthday, and the accounts will continue as they were set up, with optional transfers to other investments if desired.  Parents can continue to make tax-free deposits of up to £1,200 per year, and there can still be no withdrawals until the ‘maturity’ date.

In March this year, the government released details of the current plan to replace the CTF, which is a tax-free savings account for children, minus the government up-front funds. They are calling it a Junior ISA, but it will be a bit different from the usual Individual Savings Account.  The yearly maximum on savings will be raised from £1,200 to £3,000, and the 18th birthday maturity date will remain the same.  The Jr. ISA will not be available to parents who already have a CTF account.

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