Child trust funds scrapped

New chancellor George Osborne has advised that Child Trust Funds will be scrapped in January.  What does that mean to people who already have an account and those who are expecting a baby?

Child Trust Funds (CTFs) were intended to give children a financial head start in life.  Currently, every baby born after 31st August 2002 receives at least £250, with children getting a top-up payment from the government (usually £250) when they turn seven (both in voucher form).

In the future, government contributions into CTFs will firstly reduce and then stop altogether.  Subject to legislation being approved by parliament, the new government intends to reduce the amount of money that children receive at birth from £250 to just £50 from 1st August 2010.  Children from lower income households will receive £100, down from £500.  On the same date, it is planned that all government top-up payments at age seven will end.  This will affect all children that turn seven after 1st August.  From January 1st 2011, new vouchers will no longer be issued.

For those with CTFs already it is expected that they will continue to operate as they do now.  That is to say, they will likely continue to be CTF accounts until the child’s 18th birthday and will carry on benefiting from tax-free investment growth.  However, once the new legislation is in place, there will be no further entitlement to government contributions.

If you are expecting a child and it is born before the legislation to stop issuing CTF vouchers is in place and you meet the other eligibility requirements you will still receive a CTF voucher.  Alternatively, if you have received a voucher, but have not yet used it, you can still do so up to the expiry date shown on the voucher.  If you do not use it, HM Revenue & Customs will open an account for your child and tell you about it.

So, the good news is, for those who already have a CTF, they won’t lose anything – family and friends will still be able to top up existing accounts – up to £1,200 a year, and the account should remain in place until the child turns 18.  Such children can continue to benefit from tax-free investment growth.

For those who haven’t yet opened an account, but are entitled to one and have their voucher, please make use it while you can; as much as you can.  You may no longer receive a top-up when your child turns seven, but at least the account will be there and if you can, you will be able to top it up.

One final piece of ‘good news’ in all of this, the government will save £320 million from reducing and then stopping its contributions to CTFs.  It is part of a planned £6.24 billion worth of spending cuts this year.