On Tuesday, around 6.3million children born between 1 September 2002 and 2 January 2011 will begin to be able to access billions of pounds paid into Child Trust Funds when they turn 18.
These tax-free savings accounts were set up for all children born throughout most of the 2000s with government vouchers of £250, or £500 for those from lower income families, with parents, family and friends able to contribute too.
Cash and investment options were available, with the total amount saved an estimated £7.45billion in 2016, according to the taxman, a figure which will have increased over the last few years as savers earn interest or their investments grow in value.
Those celebrating their 18th birthday from next Tuesday may also have another reason to celebrate – they are set to be the first ‘Child Trust Fund babies’ who could inherit thousands
It means hundreds of thousands of teenagers every year could receive thousands of pounds, with some whose parents paid in the maximum each year set to gain access to a pot of up to £200,000, according to one provider.
But what happens to a Child Trust Fund when its holder turns 18, and what are the options available? This is Money answers some common questions.
I have a Child Trust Fund, what happens when I turn 18?
Some 420,000 CTFs are estimated to mature this year, with their holders turning 18.
Holders can manage their money when they turn 16 but can only choose to withdraw it or move it somewhere else when they become an adult.
Provided the CTF provider still has contact details for you, they will contact you before your account matures outlining the available options you have.
The main ones are to withdraw all or some of the money as cash, transfer it to an adult Isa from another provider, or keep it with the current provider. If someone holds a cash CTF with a provider, then it would be transferred into a cash Isa, with the same going for stocks and shares versions.
If a provider does not offer a tax-free adult Isa, it will instead be transferred to an equivalent account which keeps its tax-free status, so savers can continue to benefit from the interest while they decide what to do with it.
CTFs will also be transferred to tax-free accounts in instances where an accountholder doesn’t contact their provider with their choice before they turn 18.
This is particularly important for those who no longer have details for their CTF, or where HMRC set up an account on behalf of their parents and nothing was added to the initial government voucher, as it means they don’t lose out on earning tax-free interest.
Where is my Child Trust Fund?
Around 1.74million CTFs were opened by the taxman on behalf of children born between 2002 and 2011, as their parents did not, meaning those who soon turn 18 may not have any idea where their money is.
With children moving home and providers not keeping up with changes in contact details, or parents not paying in any money themselves and forgetting about the accounts, many will need to track down so-called ‘lost’ CTFs.
This can be done through HMRC, with those looking to trace their savings needing their National Insurance number and some other personal details.
Save the money in cash?
If savers want to keep their money close because they aren’t sure what they want to do with it, they can opt for a savings account.
A survey of 1,000 13-18-year-olds from OneFamily, which runs a quarter of Child Trust Funds, found close to four in five would save the money if they were given £5,000, which many are about to be.
However, if they do, it is important to keep it in an Isa, especially if they have a much larger Child Trust Fund.
Withdrawing money from a Child Trust Fund into your bank account strips it of its tax-free status, and means it eats into your £20,000 annual Isa allowance if you subsequently opened an Isa and deposited the money back in.
Instead, savers can open an adult cash Isa, and transfer their old CTF balance into it, provided the Isa accepts transfers. Transferring the money means savers keep their full £20,000 adult Isa allowance, meaning they can pay in £20,000 in addition to whatever has been saved over the last 18 years.
Savers can shelter up to £20,000 a year tax-free each year in Isas
‘Regardless of what they decide to do long term, 18-year-olds should keep it in an Isa’, Anna Bowes, co-founder of analysts Savings Champion, said.
‘Until they make the decision of whether they will be spending in the short term or saving for the long term, they can leave it is a cash Isa earning tax-free interest.
‘But as ever, they need to shop around for the best rates as that can make all the difference.’
The best easy-access Isa rate in This is Money’s tables without a time-limited bonus rate which accepts transfers is offered by Cynergy Bank and pays 0.9 per cent.
An easy-access Isa means savers can take the money out at any time or move it somewhere else if they decide to do something with it.
Save the money for a house?
While stock markets have recovered most of the enormous falls we saw earlier this year in February and March, savers with Child Trust Funds should be aware they could be losing money if they sell off their investments and withdraw the money.
The average CTF held with OneFamily, which runs one in four UK CTFs, lost between 8 per cent and 17 per cent of its value between March and May.
Its core fund has regained around 18 per cent in value since April, but savers may still be selling at a loss.
They may therefore be better off keeping their investments where they are rather than trying to move them in the short term, as they will be transferred into an adult Isa and retain their tax-free status.
If 18-year-olds are sure they want to put the money towards the deposit for a house sometime in the future, then it might be worth considering depositing their CTF money into a different type of Isa.
The Lifetime Isa enables savers to put away up to £4,000 a year tax-free, to which the government adds a 25 per cent bonus of up to £1,000.
Savers can open one up to the age of 40, and the money can only be used to buy a first home or for the purposes of retirement after the age of 55.
The bonus makes it an attractive option for first-time buyers who know they wish to save in the short or medium term for a house, and cash and stocks and shares options of the Isa are available.
However, there are a number of rules to be aware of.
Firstly, if someone is looking to transfer Child Trust Fund cash into a Lifetime Isa, they can only transfer up to £4,000 each tax year, due to the allowance.
This does mean they could transfer £4,000 and keep any extra money in another cash Isa, if their CTF pot was large enough.
For those looking to transfer an investment CTF into an investment Lifetime Isa, investments have to be sold off before being repurchased within the new Lifetime Isa, according to the investment platform EQi. This means those who have seen the value of their investments fall by the time their CTF matures may lose out.
And finally, think of the Lifetime Isa as something of a lobster pot. Be sure you want to set the money aside for a house deposit, as withdrawals for any other reason will see you penalised once that money is deposited.
The withdrawal penalty is currently 20 per cent, meaning you only lose the bonus, but this will increase to 25 per cent next year.
Should you invest the money?
Those who are looking to grow their money over the longer term and don’t feel they need instant access to it may want to consider investing their pot.
Over an 18-year period, it’s almost certain that investment, or stakeholder, CTFs have outperformed those which were held in cash, so use that as a barometer if you are planning on investing over a similar timeframe.
OneFamily’s highest value stocks and shares CTF, for example, is worth £74,000, £17,000 more than its highest value cash CTF.
If you have a cash CTF you wish to invest, you can open a new DIY investment Isa and transfer the money into it to then invest, while you can transfer funds and stocks held in an investment CTF straight into a new DIY investment Isa, provided the same funds and shares are available.
It is important to watch out for the cost of investing, and to do your research if you are planning on becoming an investor for the first time, such as by reading This is Money’s DIY investing guide and guide to investment platforms.
Make a plan… and don’t panic!
Ultimately, whatever you decide to do, and these are just some potential homes for your Child Trust Fund money, experts say the most important thing is to have a plan and think about what it is you want to do with the money.
EQi’s Richard Pearson said: ‘Young people mustn’t panic when faced with this much money. There are lots of options for re-investing their money, so they should take time to plan for the future before deciding what to do next.’
Adrian Lowcock, head of personal investing at investment platform Willis Owen, said: ‘Ask yourself whether you need the money now, and if not then decide when you think you will need the money.
‘The key to this is to have a plan. That may involve talking to your parents about what they want the money to be used for and to give some advice.
‘Whilst investing is often a good long term strategy the fact is it won’t be for everyone, if you are risk-averse then consider alternatives such as a cash Isa or using the money to top up your Lifetime Isa allowance as this could give a nice boost to help you get a deposit for a house.
‘Such things may seem a long way in the future but saving for these things can have such a big impact on your finances in the long term.’