What should I do with my Child Trust Fund?

Dear Iona,

My mum and dad opened a Child Trust Fund for me in 2002. I turned 18 last week and I have about £15,000 in there. I didn't even realise I had a CTF until my parents discussed it with me this summer!

I'm lucky to be earning while learning on an apprenticeship and am staying at home with my parents, so I don't urgently need the money. Having said that, I want to spend a bit of the cash on a new phone and equipment for a Youtube channel I've started (and my group of friends is planning a holiday to Turkey, which is on the travel corridor list). So what should I do? My parents say I should make the decision myself.
Holly, 18

Dear Holly,

It’s great that your parents were on the ball and able to build up these savings on your behalf. You’re certainly not alone. For anyone who has turned 18 since 1 September, or who is coming up to 18, a big windfall may be due.

The Child Trust Fund was a Labour initiative from the early 2000s. Through the account, you got a £250 bung from the government if you were born up until 2 January 2011. This went up to £500 for children from low income families. The free money ended in 2011 but since April 2015, parents have been able to convert a CTF into a Junior Isa. Some parents (like yours) have also kept contributing money into the account and if they had smartly invested it, would have produced a sizable pot by the time their child turned 18.

And it’s not unusual for young people to forget (or not even be aware!) that they have a Child Trust Fund. A recent survey of 16- and 17-year-olds found almost two-thirds had never heard of a CTF. The teens were asked what they would do with their little (or not so little) handout. Just under half were unsure. Only one in 10 said they would go out and spend it – but I’m sure the real number is higher than that! One in four said they would continue to save. 

Your parents are right to let you decide what to do with your Child Trust Fund. Now that you’ve turned 18, you’re an adult and entitled to use the money however you see fit. 

I also don’t blame you for wanting to spend some of the money now. Life is for enjoyment as well as fulfilling goals and we all need things to look forward to, especially in these dark and weird times. But if you just wanted to make it rain because you can, I would be worried. Once that money is gone, it’s not coming back, so you need to be sure you’re invested it in things and experiences that genuinely made your life better.

I also don’t blame you for wanting to spend some of the money now. We all need things to look forward to, especially in these dark and weird times

Fortunately, you seem to have a clear plan for your cash but you still need to get a handle on costs. Do your research and find out how much you really need to spend. People often splash the cash on video equipment when a few core items are all that’s needed (and they don’t always need to be top-of-the-range). Likewise, you need to make sure your friends provide exact costings for your trip. Whilst you figure this stuff out, I’d recommend keeping £3000 in an easy access savings account (or a Premium Bond). 

The question is: what should you do with the rest of the money? The problem with saving is that interest rates are now so small that you need a microscope to see them. That means your money is losing value in real terms. Interest rates need to be higher than inflation for your savings to keep up with and overtake rising prices in the economy. There’s little chance of that happening anytime soon.

If you want to buy your own place in the future, I would move at least some of the money into a Lifetime Isa, or LISA. You can put in up to £4000 each tax year. And the good news is the government will pay you £1 for every £4 you put in. It doesn’t get any better than that. 

 Interest rates are now so small that you need a microscope to see them. That means your money is losing value in real terms

There’s a massive catch and it’s this: you can only take the money out when you’re buying a property, or failing that as an alternative pension when you’re 60 (you can pay in until you’re 50). Otherwise, you pay a withdrawal penalty of 25% (this has been temporarily reduced during Covid but is likely to be reinstated in future).

You can put your LISA into savings: Moneybox offers the best cash rate at 1.1%. Alternatively, you could invest it if you think your home-buying dream is at least five years away. The stock market offers the potential to grow your money far more, but only if you’re in it for the long-haul. This is not a get-rich-quick option and it’s not suitable if you want to buy property sooner rather than later (i.e. within five or even ten years). With investing, you might not get back what you put in. 

Maybe now is the time to figure out if home ownership is a goal you want to work towards and if so, where you want to buy and how much you’ll need to save up. Then you can work backwards and understand whether to save or invest your LISA. I wrote a helpful piece about this for the Financial Times which should give you some pointers.

Be aware that investing is a much riskier option than saving…you might not get back what you put in 

Moneybox and Nutmeg both offer ready-made investment portfolios for LISA investors which may be worth checking out. They use cheap investments called exchange trust funds or ETFs and this makes things a bit simpler compared to picking out all own investments, with the risk and responsibility that entails.

But I wouldn’t put all my eggs in the LISA basket. You get a £20,000 Isa allowance every year so you could put some of your remaining cash into a stocks and shares Isa.

Drip-feed your money with a £100 contribution every month and check out either Vanguard‘s low-cost portfolios or a so-called ‘robo adviser’ like Wealthsimple, Wealthify, Moneyfarm or Plum (which acts like a chatbot). 

I’ll be discussing all these issues in far more depth in my upcoming book, Own It!, which you can pre-order now.

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