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Over the next 12 months, around 800,000 lucky teenagers who are turning 18, will get an extra birthday present in the form of a windfall, as the first wave of child trust funds (CTFs) and Junior ISAs start to mature.
CTFs were launched in 2005 but were available for children born on or after 1 September 2002 – children who will celebrate their 18th birthday this month.
CTFs were a scheme to give every child some savings and, in the early days, the government contributed £250 per child or £500 for those from low income families. At age seven, a second sum of £250 or £500 was given.
The initial sum reduced to £50 or £100 for lower income families in August 2010 and was stopped completely in 2011 and replaced by the Junior ISA.
Transfers from CTFs to Junior ISAs were permitted from April 2015 and many parents moved the money to benefit from a wider choice of providers and investments.
However, many CTFs still remain and children born between 1 September 2002 and 2 January 2011 will have something saved somewhere, even if the parents are unaware of the account’s existence: if they didn’t open the CTF themselves, the government opened an account for them.
If you think you may have a CTF but are not sure which provider it is with, you can get help finding it here.
In total, some £700 million of CTF assets will mature this tax year and £7.5 billion over the next decade*. Additional money will also mature from Junior ISA accounts.
Savings into both could be put into either cash accounts or stocks and shares accounts. HM Revenue and Customs (HMRC) statistics suggest that more than half of CTF vouchers were allocated to cash via bank or building societies, as parents opted for safety and/or familiarity over the stock market.
Unfortunately, that would have proved to be a missed opportunity, because despite experiencing two stock market crashes in the intervening years – the global financial crisis and the coronavirus pandemic – stocks and shares have performed better than cash.
From 11 April 2005 to date a cash CTF would have turned a £1,000 investment into about £1,715 today^. Not all funds were available for CTFs, but as a proxy, the average UK equity fund would have turned the same initial investment into £2,310^.
If a parent or guardian chose to invest overseas, the amount would have become £3,393^ in the average global equity fund and £3,681 in the average emerging markets equity fund^.
The best performing fund over the period was Elite Rated Baillie Gifford Global Discovery, which would have given a huge windfall of £12,162^. AXA Framlington Global Technology fund is also in the top five best performing funds and would have produced £11,244^.
The best performing investment trust was Scottish Mortgage, which produced a pot of money worth a staggering £16,841^.
“Taking time to have the conversation now with your child about how to use the money will mean they can plan ahead,” commented Juliet Schooling Latter, research director at FundCalibre.
“No doubt some will want to spend the money immediately, but others may like to use it towards their university education, or even invest it in an adult ISA so that it can continue to grow and be used for other life events in the future – like buying a house or getting married.”
Since Junior ISAs were established in 2011, 4.7 million accounts have been opened and £5.3 million invested**. But cash savings are still proving more popular than stocks and shares. The latest figures from HMRC show that £974 million was subscribed to Junior ISA accounts in the 2018-19 tax year, around 57% of which was in cash**.
Stocks and shares Junior ISAs are riskier than cash and can fall in value. But they can potentially produce higher returns over the long term as the figures above show.
And the long term is what Junior ISAs are all about – they are savings vehicles that last almost two decades. You can open them when a child is born and contribute to them until they are 18 years old.
Up to £9,000 can now be invested in a Junior ISA on behalf of a child each year, and the beauty is, anyone can contribute: parents; wider family and friends.
“When investing for children – especially if you want them to start investing themselves – I think it’s really important to invest in something they can relate to and show an interest in when you are talking to them about it,” continued Juliet.
“The two best performing trusts and funds since the CTF was introduced are great examples of this – Scottish Mortgage Investment Trust and Baillie Gifford Global Discovery – with holdings like Tesla, Spotify, Amazon, Netflix and Ocado^^, as are the technology funds like AXA Framlington Global Technology.
“Global equity funds, such as those already mentioned, are still likely to do well in the future and I hope that funds investing in companies combating climate change will also rise in prominence and do well – funds like Pictet Global Environmental Opportunities and Ninety One Global Environment, for example. If we are investing for our children’s future, what better place to start than by investing in a better future for our planet too?”
*Source: A freedom of information request to HM Revenue & Customs from Quilter.
^Source: FE Analytics, total returns in sterling, 11 April 2005 to 10 August 2020, using the Bank of England base rate +2% as a proxy for cash CTFs, the IA UK All Companies, IA Global and IA Global Emerging Markets sector peer groups.
**Source: HMRC ISA statistics, June 2020, 2018-2019 tax year.
^^Source: fund factsheet, 30 June 2020