Happy Birthday Child Trust Funds
On 6th September, the Share Foundation hosted a birthday party for Child Trust Funds (CTFs) at the Houses of Parliament. The party was attended by the policy makers, companies who manage the funds, and teenagers who will be beneficiaries (and their families).
Ruth Kelly, who was finance secretary to the Treasury when CTFs were launched, gave a speech reflecting upon the original ambitions for CTFs and what they could mean for young adults. Gavin Oldham, founder of the Share Foundation which looks after the funds of children in care, presented the Stepladder campaign for improving financial literacy. Gavin also underlined the challenge of finding the owners of one million lost accounts (where the address of the account owner is unknown).
As the fund is locked away for 18 years CTFs provide a unique opportunity to look at long term fund performance; I spoke with several people at the party to find out where they had invested the money. FTSE-trackers came high on the list, which was often the default for accounts allocated by HMRC (because parents had not opened an account themselves). Unfortunately with the financial crash coming within the last 16 years, ￡250 invested one-off in 2002 would be worth ￡462 today (just under 4% annual return). This is not far from some of rates that ‘deposit’ takers were offering. Perhaps those born in 2009 might prove to be the major winners!
The long term fund performance will be masked where an account received regular top-ups and extra money from family members over the years, but these accounts are by far the fewer. For many parents I spoke to, the money had been invested upfront and the account mostly forgotten about. In all cases the children were not aware they had an account. It will be interesting in the coming years to see how this might change. Will 16 year-olds start discussing it with their friends and compare whose parents made the wisest investment choices?! If at least it creates the discussion (and financial awareness follows) then this has got to be a positive effect.
The next landmark in two years will then be the point when young adults have greater choices with the possibility of withdrawing money. Will they just cash-in and treat themselves on their 18 birthday or will they use the fund as a base for continued saving? Some parents view the fund as a positive nudge to greater savings which will demonstrate the value of long term investment. A straw poll from the industry suggests a demographic split with the poorer households (20% of all accounts) opting to take the money and run.
A key indicator will be the level of interest from 16 year-olds in their accounts. There is a two year window to raise education and plan for either ‘withdrawal-day’ or ‘savings-day’. Remembering that this is not a one-off event but a programme that will run for at least 11 years as the youngest CTF beneficiaries are just 7 years old today.
If you are a parent currently holding a CTF for your child(ren), I’d be pleased to hear your comments or message me direct; you can also email me at [email protected]