Happy Birthday to the 50,000 or so Brits turning 18 this month. You are the first of an estimated 800,000 young people who will, in the next year, gain access to the tax-free savings of a Child Trust Fund (CTF). Opportunity awaits – in the words of the government’s Money Advice Service website, “it’s your money, and it’s up to you what you do with it.”
Indeed, HMRC is so keen to ensure that teenagers get hold of their savings that they have launched a tool which allows them to check for an account, even if their parents don’t tell them about it. The tool opposes the many critics who claim 18-year-olds shouldn’t get access to the pots of money squirrelled away by their parents until they are deemed responsible enough to do the right thing with it.
But what is the right thing? Spending it, sticking it in the bank, saving it in stocks and shares? Regardless of the decision, teenagers will benefit from gaining access to their savings: financial freedom promotes responsibility, not recklessness.
In fact, the bigger threat facing the recipients of maturing child trust funds is not that the money will be wasted. It is the same threat that their parents struggled with when they set up the CTF in the first place: how to pick a provider which isn’t going to rip them off.
CTFs were part of the 2001 Labour Party manifesto and were launched in January 2005, with children born after 1 September 2002 granted eligibility. Every new parent was awarded £250 on behalf of the child which could be saved in one of three savings accounts: cash, shares, or protected shares which automatically lowered the risk profile of the portfolio after the child’s thirteenth birthday.
Parents who have maximised their contributions since the scheme was started will have saved more than £55,000 over 18 years, meaning those who have invested sensibly on behalf of their children could be handing over a sizeable pot of capital when the account matures. CTFs have a combined estimated maturity value of £2.4m this year alone.
But critics of the scheme think that value could have been much greater if it wasn’t for the way CTF savings have been managed. In 2012, soon after the scheme was closed to new members, an estimated 900,000 of the 6m accounts in the UK were managed by one provider – Children’s Mutual, which is now known as Foresters Financial. That year, the fund charged annual fees of 1.5 per cent, but only grew by 1.3 per cent.
The lack of competition meant that Children’s Mutual and other so-called ‘zombie funds’ made big profits from the money saved in CTFs, without delivering much by way of returns. A combination of this poor performance and the fact that a cash savings account was the default option for parents who didn’t want to make a decision with their £250, means the average maturing value of a CTF is less than £900.
Still, that’s not an insignificant sum of money for an eighteen year old – it is, in fact, equivalent to five weeks of student maintenance. And for the many thousands of young people pondering an uncertain future in the wake of the coronavirus pandemic, the money is likely to be very welcome. Popular advice says the best destination for that money is a stocks and shares ISA, which is exempt from all of the same taxes as the CTF. The Share Centre estimates that the average £877 CTF pot could be worth £1125 within five years if it is invested in a stocks and shares account, compared to just £922 if it is kept in cash.
But the 800,000 people who will turn 18 in the next 12 months and gain access to their savings are facing a quagmire of choices when it comes to picking an investment platform, the numbers of which have exploded in number in recent years. And choice has not removed the fact that many providers, advisers and funds charge high fees without delivering especially impressive returns.
Financial freedoms – whether that is teenagers gaining access to their savings accounts or retirees getting hold of all the cash in their pensions – are a good thing for both individuals and the stock market. But they must go hand in hand with a better financial education for all, or the biggest beneficiaries will be the financial services companies with the largest marketing budgets.
Fund managers with a decent digital offering will be rubbing their hands together at the thoughts of hundreds of thousands of 18-year-olds getting access to a savings account and being encouraged to invest it in the stock market. But young people need to be cautious about getting ripped off. And the regulator needs to keep its eyes peeled.
