Top tips for teenagers receiving a CTF windfall
Thousands of teenagers found themselves cash rich when the first Child Trust Funds (CTF) matured in September. The average EQi CTF balance is £6,500 – however, some are much higher, with one worth £200,000.
CTFs were launched by the government in 2005, offering children born after 1 September 2002 vouchers worth up to £500 to save tax free, until 1 January 2011 when the product was replaced with the Junior ISA. There is now an estimated 6.3million CTFs in the UK, worth more than £6bn, with the first 420,000 funds maturing this year when account holders reach 18.
Some teenagers might not even be aware they have a CTF, while many accounts may have become forgotten because of changes to the personal circumstances of the parents and grandparents that opened them. The government has launched a service to help people track down lost CTFs.
However, many teenagers with investment CTFs will have seen their balances grown significantly and might not now what to do with their sudden cash bonanza. Richard Pearson, director at EQi, says: “Thousands of teenagers will be getting a nice nest egg over the next few months when their Child Trust Fund matures, and after the recent stress of A-level exams, this will be a welcome and possibly even a surprise windfall.
“More importantly, it will be a great kickstart to their finances in such uncertain times. But 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.”
Here are Richard’s top five tips:
1. Don’t panic!
There is no need to make big decisions on the day your investment CTF matures. You can stick with the investments already in your CTF account and just move these into an ISA or a LISA. If young people aren’t quite ready to take on the responsibility of managing that much money right away, they can nominate a third party such as a parent, guardian or even a financial adviser to manage their ISA or LISA for them until they are ready to do it themselves.
2. Think about the future, especially in such uncertain times
The usual temptation could be to spend at least some of the money, perhaps on a car or a holiday. The impact of COVID-19 means things like travel might not be possible for a while, so it’s another good reason to start planning the future. For example, a CTF could provide a big chunk towards a deposit for a mortgage, or even kick start a pension.
3. Make the most of your tax-free allowance
Teenagers can move their CTF balance into a tax-free ISA and it won’t count towards the normal £20,000 annual allowance. This means you are allowed to save up to a further £20,000 a year in an ISA, in addition to whatever you transferred from your CTF, if you’re lucky enough to have that much spare cash.
4. Better still, get extra money from the government
If you open a LISA (Lifetime ISA), you’ll also get a bonus from the government of 25% of the amount you invest, up to a maximum total investment of £4,000 – so if you transfer £4,000 from your CTF into a LISA, the government will give you another £1,000. If there’s more than £4,000 in your CTF, you can put the rest into a normal ISA. But remember LISAs can only be used towards a mortgage for a first-time buyer or for saving towards your retirement.
It’s a bit more complicated if your CTF is in investments rather than cash, as the investments have to be sold first and the cash deposited into the LISA, where you can then re-purchase your investments. EQi will manage the process of selling and re-purchasing the investments in the LISA for his customers and will not charge dealing fees.
5. It’s a great opportunity to start investing
Investing has become increasingly popular with young people, particularly as the interest rates on normal savings accounts are so bad. If you’ve already had an investment CTF, you can stick with the same investment choices in your ISA or LISA, otherwise there are good range of starter funds for people just getting into investing. Young people don’t need to make large contributions if they don’t have an income. An easy way is to add to your ISA or LISA with Christmas or birthday money.
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