Next Tuesday is a big day for anyone who turns 18 later this year. While the milestone birthday is always a good reason to celebrate, this year’s batch of newly-fledged adults who turn 18 from 1 September onwards, have another reason too - because they are likely to be sitting on a financial windfall.
That’s because Tuesday 1 September marks the day the Child Trust Fund (CTF) comes of age. This means thousands of teenagers who also turn 18 from the 1 September 2020 onwards, will, on their own 18th birthday, be able to get their hands on money that was invested for them before their very first birthday.
Back in September 2002 the parents or guardians of every baby born from then until 2 January 2011, were sent a £250 voucher to set-up a child trust fund in their child’s name. Parents on a low income at the time would have received a £500 voucher. This voucher had to be used to set up a Child Trust Fund account in the child’s name.
Parents had 12 months in which to use the voucher. If that didn’t happen, for whatever reason, then the government would have saved the £250 into a cash CTF in the eligible child’s name on your behalf.
If that’s your child, then it’s likely that you, and they, will be sitting on windfalls they know nothing about. Estimates suggest that as many as two million teenagers have a child trust fund in their name that they either know nothing about, or they and their parents have simply forgotten about. According to HMRC, as much as £2.5 billion is thought to be sitting idle in child trust funds taken out for children who’ve since lost track or forgotten their accounts.
And if that is you or your soon-to-be 18-year-old, then tracking down that lost child trust fund may be well worth it. Bearing in mind that all money earned on the child trust fund is tax-free, including capital gains, interest payments and any other money earned on the account, a decent sum can have built up, even if nothing more was added.
As a rough guide, a dormant child trust fund with just £250 contributed from the government in 2002 and nothing more added, could be worth over £800 by now, if it had been invested in a FTSE 100 tracker fund. And with an estimated £9.3 billion invested in child trust funds in the UK, the chances are that many 18 year olds whose parents topped it up over the years, will be sitting on substantially more.
What these ‘hidden’ windfalls highlight is just how powerful the power of compounding and time is on even very small sums invested. And how the benefits of youth can really add up if you save diligently for a child.
Child trust funds have since been replaced by the Junior ISA, and with the ability to save up to £9,000 a year into one, they are a great way to save for a child’s future.
Five year performance
As at 24 Aug
Past performance is not a reliable indicator of future returns
Source: Refinitiv, total returns as at 24.08.20, in local currency
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