When a Child Trust Fund account is opened, the government begins by making a contribution of £250. This contribution will be repeated on or around the child's seventh birthday. Aside from this, however, it is up to the family and friends of the child to choose whether or not they wish to contribute.
Tax Efficiency
The government wishes to encourage families to save for children, in order to offer them a financial head-start when they reach adulthood. As such, any contributions to a CTF account are completely tax-free. Similarly, if the trust renders a gain, no Capital Gains Tax will be levied. Up to £1,200 can be placed into the account in any single year, not including any contribution that has been made by the government. It should be noted that these years run not from April to April like a tax year, but rather from the child's birthday to the day before the child's next birthday.
The means by which individuals can contribute depends on the account type and the terms set by the provider, unless the contributions are being made to a stakeholder account. Providers of such accounts must accept payment by direct debit, standing order or cheque. Providers of savings accounts or straight share investment accounts can make their own decision regarding accepted methods of payment; if this is a concern, you should make sure you are aware of their accepted methods before opening the account.
It is also important to remember that some account providers may set limits on minimum contributions, but again the government has set rules regarding minimum payments into stakeholder accounts.
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Withdrawing
Once your child reaches the age of 16, they will become responsible for the management of the account. At the age of 18 they will be able to withdraw the funds themselves; no-one is permitted to make a withdrawal before this time. As the CTF was introduced in 2005, no accounts have yet reached maturity. The government has said, however, that account holders will have a choice regarding their money when they reach 18. They will, of course, be permitted to simply withdraw the money and use it as they see fit.
Alternatively, however, the government will arrange for CTF accounts to be allowed to transfer into Individual Savings Accounts, or issues. This means that the account holder will have the option to continue saving some or all of the money that has been placed in trust for them. The first CTF accounts reached maturity in September 2020, the practicalities of these transfers have not yet been worked out. Account holders will be advised of the correct processes at the relevant time.
It should be noted that there is no guaranteed return on a Child Trust Fund unless the money is paid into a simple savings account. In this way, it may not be possible to predict how much the mature account will be worth until the last minute. Clearly, however, the level of contributions made to the account, as well as the interest rate, will have a significant effect on its final value.
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