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Weekend reading: Child Trust Funds come of age

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What caught my eye this week.

Remember Child Trust Funds, the more generous precursor of the Junior ISA?

I wouldn’t blame you for forgetting. Those halcyon days of 2005 when Gordon Brown felt able to hand the parents of three-year old children £500 towards their future almost feels like science-fiction now, post the financial crisis, post-austerity, post-Brexit, and mid-pandemic.

Nevertheless hand parents £500 to tax efficiently invest for their kids Brown did. And with the first Child Trust Fund (CTF) recipients turning 18 this year, next month will see small fortunes unlocked across the land.

Indeed the investment platform EQi says that while its average client’s CTF balance is £6,500, a few lucky mini-moguls are sitting on CTFs worth £200,000!

Parents could have topped up that initial £500 from the government with a massive £55,000 over the years, and presumably some did to generate these six-figure fortunes.

Either that or we have some new mini-Buffetts coming up…

The kids are alright

The average account is of course much smaller – there are an estimated 6.3 million CTFs in existence, holding perhaps £6bn in total. Of these EQi reckons 420,000 are about to mature, which sees the kids gain control of the purse strings.

No doubt second hand car salesmen, guitar vendors, nail salon owners, and lululemon store managers are all licking their lips at an imminent windfall.

But it’s worth stressing to any suddenly-minted teens within earshot that you don’t need to spend the money just because you’re 18.

A CTF automatically becomes a standard tax-free ISA at 18. And unless they’re spending the money on a house deposit or perhaps on education, that’s what most should do. Young people are already plenty rich without throwing money at them.

Maybe sit them in front of a compound interest calculator? Even EQi’s middling £6,500 balance could be worth over a quarter of a million pounds by the time a child reaches 65 – if left to compound tax-free with an assumed growth rate of 8%.

A kid with £25,000 or so in their CTF could in theory have a shot at becoming a (nominal) millionaire pensioner without saving another penny!

Of course, kids are kids. Heck, many adults are kids. Most of the money – an estimated £2.4bn this year alone, according to EQi – will probably be spent without too much soul searching.

But if you are blessed with a child who will read the Financial Times with you1, then do peruse its take on how to deal with this good problem to have. At the least, as the article warns, don’t even think about protecting little Jonny or Jemima from themselves:

For any parents thinking of not telling their children about their investment pot, Tim Stovold, head of tax at Moore Kingston Smith, notes:

“Parents planning not to pass on the good news until their teenagers hit the sensible years should be aware that HMRC has provided a tool to allow children to check whether a nest egg awaits them — even if their parents don’t tell them.”

Have a great (wet and chilly) bank holiday weekend.

Are your kids (or you) in the money on the back of a maturing CTF? Share your plans for the loot in the comments below.

From Monevator

[*wind rustles through the trees*]

From the archive-ator: 10 lessons learned from accidentally starting a business – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!2

US Fed relaxes inflation target in policy shift – BBC

Eat Out to Help Out drives UK economic recovery in August – Guardian

Global dividends suffer worst quarterly fall since 2009 [Search result]FT

UK housing demand soars since end of lockdown – Guardian

Triple-lock on state pension increases could be curbed – ThisIsMoney

UK ‘lifeboat’ scheme for company pensions at risk, says former minister – Guardian

Citi’s $900 million loan error is still perplexing – Bloomberg

Gold fever in 2020 means exchanged-traded funds – Bloomberg via MSN Money

Products and services

Smart meter rollout falls further behind target due to the coronavirus – ThisIsMoney

Is it worth fixing your mortgage for 7-10 years for a 90% loan-to-value loan? – ThisIsMoney

How is coronavirus affecting house prices? – Which

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

Which restaurants will offer Eat Out to Help Out discounts in September? – Which

Homes for sale in converted farm buildings [Gallery]Guardian

Comment and opinion

On the other hand… – Creative Planning

The timing mistake: Thoughts and pushback – Barry Ritholz

We need to do better at predicting the end (of retirement) – Morningstar

How to become a millionaire by investing £10 a day [Video] – Humble Penny via YouTube

Pile right in, or little by little? – The Financial Bodyguard

Portfolio checkup – Humble Dollar

Socially Responsible Investing: Is it also more profitable? – Mr Money Mustache

Risk and return are not evenly distributed – A Wealth of Common Sense

In the eye of the beholder – Of Dollars and Data

Alternative forms of wealth – Morgan Housel

Bad luck if you held risk premia/factors in your portfolio in recent years – Factor Research

Naughty corner: Active antics

John Kay: A lifetime in investment trusts [Search result]FT

Busting the myth that active funds to better in bear markets – Morningstar

How risky are value stocks? – Factor Research

Coronavirus corner

Sweden claims herd immunity is working and country won’t suffer second wave – Metro

Two patients were infected twice with the coronavirus, say virologists – CNN

UK sees highest number of cases since mid-June, but hospital cases still low – Guardian

‘Vanishingly small’ risk from Covid for children, study finds – Guardian

Chris Whitty: Missing school is worse for children than virus – BBC

Reopening schools: How different countries are tackling the dilemma – Guardian

In the US a new era of Covid-19 testing is about the begin – The Atlantic

Leaked document reveals Cabinet’s emergency plans for ‘perfect storm of No Deal Brexit and coronavirus second wave’ – The Sun

White House, petri dish – The Atlantic

Kindle book bargains

Captivate: The Science Of Succeeding With People by Vanessa van Edwards – £0.99 on Kindle

Talk Like TED: 9 Public Speaking Secrets by Carmine Gallo – £0.99 on Kindle

Super Thinking by Gabriel Weinberg and Lauren McCann – £0.99 on Kindle

Siege: Trump Under Fire by Michael Wolff – £0.99 on Kindle

Off our beat

How Jeff Bezos does $10,000/hour work – RadReads

Want to be happy? Flip a coin [Reminded me of The Diceman]Klement on Investing

Blockchain: The amazing solution for almost nothing – The Correspondent

And finally…

“FI gives you the power to decide. It allows you to use your money as a tool to live a rich life, freeing yourself from the need to go to a job.”
– Chris Mamula, ChooseFI: Your Blueprint to Financial Independence

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  1. Congratulations! You’ve unlocked the Monevator Gold Star Parenting award. []
  2. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []
{ 29 comments… add one }
  • 1 Algernond August 28, 2020, 7:29 pm

    Transferred daughter’s from stocks & bonds CTF to cash ISA in 2015, at a peak in the S&P500. So that was good timing. Been getting > 3% interest since then. Maybe should have kept it in shares.
    Next year, she will have to decide, does she start spending immediately on tuition fees, or get student loan and take bet she can make more than the student loan interest by re-investing it in Stocks / bonds….
    Thoughts anyone?

  • 2 Grislybear August 28, 2020, 7:53 pm

    Never thought I would see a link to The Sun in Monevator. However on the plus side I regard that comic as complete garbage and rammed full of lies, therefore everything in the link is complete nonsense and will never happen.

  • 3 Pinkney August 28, 2020, 8:28 pm

    The sun has been quite good at backing the winner seeing a link in monevator perhaps shows the times are a changing. Crikey 200k in CTF I feel like a poor parent now and such a hopeless picker of shares/funds.

  • 4 David August 28, 2020, 9:33 pm

    I enjoyed that old guest post Monevator article about starting a business “by mistake”. It certainly resonates with my experience so far. I hope they found success with something else though, as “Mon£yGrow£rs” looks to be no more.

  • 5 mucgoo August 28, 2020, 10:22 pm

    @Algernond

    Almost certainly take the loans. See here:
    https://www.moneysavingexpert.com/students/student-loans-tuition-fees-changes/

  • 6 The Investor August 29, 2020, 4:54 am

    Re: The Sun, I get ‘feedback’ that too many of my links are from too samey/left-leaning media. My choices in this respect are largely down to paywalls (I’d include a lot more from both The Telegraph and The Times otherwise) but I thought I’d pop that Sun link — sent to me by a reader in — on a whim as a nod to this feeling. I wouldn’t read too much into it! 😉

  • 7 C August 29, 2020, 5:39 am

    I was pleasantly surprised to see the Sun link. They deserve their exposure for that little scoop, even if their politics and modus operandi is often anathema to me. I try to read newspapers across the political spectrum to avoid groupthink and understand how others think.

  • 8 Matthew August 29, 2020, 6:20 am

    I can see this having an effect on inflation, putting money in the hands of the least savvy, and it’s lucky timing with covid

    Maybe if some do pay off student loans/ not draw new ones it’ll save the government money. I do think the American student loan system generates internet articles that misinform/scare uk students, then again if a child doesn’t have the gumption to optimise the system and also choose a useful qualification maybe university wasn’t really for them

  • 9 Warren Bogle August 29, 2020, 7:20 am

    How risky are value stocks?

    Thanks for this link. I have recently switched part of my portfolio from global equities to global value factor. These times feel a little too like the late 1990s with Bezos now ‘worth’ over $200bn and Elon Musk over $100bn and eye watering PE ratios. Value is a long time play and not such an exciting journey but the time feels right to me…

  • 10 Squirrel August 29, 2020, 7:47 am

    Interesting! I recently heard an interview on the Meaningful Money podcast with Michael Johnson, a government adviser during the Cameron years who claims to have “created” the Lifetime ISA. He explains that a few of his original ideas did not make into the final product. One of them was that every child born in the UK would get a Lifetime ISA with £500 in it. I did not know that a similar idea had been in place before!

  • 11 Matthew August 29, 2020, 8:07 am

    I suppose the problem with any attempt at equality is that it goes against a more darwinian system of meritocracy which would be better at finding & rewarding the best. Unfortunately finding the best for the best jobs means a lot left behind on the low paid scrapheap, and maybe less able to afford a big enough house to reproduce, but ultimately these individuals/ families may carry unhealthy psychological problems that ultimately should be weeded out by being destitute, struggling to expand a family, etc

  • 12 Gentleman's Family Finances August 29, 2020, 8:37 am

    Child trust funds might have sounded like a good idea at the time but they now float back to the surface like a pre cambrian fossil of a bygone era.
    What are the choices for childrens’ savings now?
    Not great overall and the best seems to be paying into my pension rather than anything going to the kids.

  • 13 Vanguardfan August 29, 2020, 9:01 am

    @mucgoo you beat me to it! @algernond the comparison is not between stock market returns and the student loan interest, because the interest rate (for all but the very highest earners) is not related to the repayments. The repayments are (currently) 9% of salary above £25,000, for 30 years. So the real question is whether the lump sum can otherwise be invested to make more money than would be saved by not having repayments (and also, if the funds are used to pay the student loan, what better use would be made of the additional take home pay?).
    Martin Lewis would say a deposit on property would be a better use of funds. Bear in mind also that student loan repayments stop if you aren’t working or earn below the threshold, unlike mortgage repayments

  • 14 Simon T August 29, 2020, 9:49 am

    In four months time my daughters CTF will mature.
    Had a deep look at it about three years ago, management fee of 1% and invested in the default FTSE 100 fund.
    Sorted that all out pretty quickly, now stands at just under £10k

  • 15 Al Cam August 29, 2020, 10:10 am

    Re the Sun link.
    Many years ago (c.mid 1980’s ) I used to commute by train for about 90 mins into London and then out, on another train, to Hampshire every Monday morning. I usually made the return journeys later in the week. For fun – sad git that I am – I used to buy both the Times & the Sun on a Monday morning – and then alternate which one I read on each leg of my journey to Hants. Rarely did I learn anything extra (apart from gossip & tittle-tattle from the Sun) but by the same token rarely were there any extra news items (not specials or foreign reports) in the Times. Often very similar phrases – albeit ruthlessly edited down – would appear in the Sun that I had/would read in the Times. They were clearly from the same stable and I grew to admire the Suns ruthless culling of extraneous verbiage – so favoured by the Times.
    Today, I still read the Times – but usually just on a Saturday. I cannot remember the last time I read the Sun. Perhaps things have changed significantly in the intervening years – I cannot tell – but the Sun certainly had its place and I for one admired its ability to convey the essence of its take on the news.

  • 16 E&G August 29, 2020, 10:20 am

    I’d suggest Matthew that it’s not low-paid households that have the unhealthy psychological problems here.

    As a father of two under fives investing for them is something I’ve looked into but largely cannot see why, beyond learning financial lessons from blowing decent sums in their late teens, it makes particular sense. Take pensions for example, I could out the money into mine which will grow at the same rate in any case and come my death they’ll likely inherit it and have earlier access or be able to reinvest it and be in the same position had I been paying it into their own. And it gives a bit more flexibility – i.e. access might be needed earlier for care fees or to find one or both of them for a deposit, business venture etc. They do each have a cash Junior ISA which grandparents contribute a wee bit too and which should give them a decent wee wedge to travel with, buy a car etc. by the time they turn 18.

  • 17 Mousecatcher097 August 29, 2020, 11:33 am

    John Kay’s article in the FT was very measured I thought. The technique of dividing the fee by the active share percentage in order to find out what you’re actually paying for genuine active management – and what proportionate costs the manager has to hurdle in order to outperform – is a very useful titbit. It’s so obvious now it’s pointed out! What’s less simple is finding out what the actual active share percentage is for any given fund. With some notable exceptions – eg Baillie Gifford, Terry Smith, Nick Train – managers for some reason don’t seem to keen on publishing the figure …

  • 18 gio scili August 29, 2020, 12:46 pm

    A word of warning on CFT / Junior ISA: my daughter has one and until one year ago I added money yearly; we have now moved to a different EU country and I am told that my daughter will only be able access her Junior ISA at 18 (or later) only if she has a U.K. bank account, meaning the Junior ISA provider keeps the money unless she goes back living in the UK… the same applies to my SIPP, unless I have a UK bank account I cannot access it (and my current UK bank will not let me keep my UK bank account long term if I live abroad). These are the kind of things providers, blogs, media, pension advisory boards don’t tell you when they encourage to open a SIPP or Junior ISA…!!!

  • 19 weenie August 29, 2020, 2:07 pm

    Hah, thanks for reminding me of The Diceman, a book which came to my thoughts some years back when I was pondering on comments of people saying that early retirement would be boring.

    I’ve already dug out my 12-sided dice (why be limited to 6?) ready to provide me with some interesting choices (by which I mean hobbies, not anything nefarious or dodgy like in the book!) of what to do if I ever need any inspiration!

    Thanks also for reminding me I have a draft post gathering dust on the topic!

  • 20 Pendle Witch August 29, 2020, 3:39 pm

    Child Trust Fund: in the early years, my other half was loathe to add any extra due to not knowing how the “Child” would turn out 🙂 With modest regular payments and decent interest rates it stands now at ~20k cash. We switched contributions to an equity Junior ISA 2 years ago so she has a foothold there if she wants it.

    Ironically, we taught her too well. Money that goes into her normal savings NEVER comes out! 16 months until it all transfers.

  • 21 Nearlyrich August 29, 2020, 6:14 pm

    Humble Dollar article. It’s a good article but Morningstar x-ray is premium …or is there a work around readers?

  • 22 Simon T August 29, 2020, 6:27 pm

    Coming back to The Sun and The Times, I was working during the Wapping strike for both of them, interesting times
    The clever-ish hacks worked on The Sun, taking stories off the wire and putting a spin on it, which the sub editors then crafted into a story
    I still chuckle at Kelvin MacKenzie running out of Murdochs office shouting “Your pensions are shit”.. I am just doing a DB/GMP to DC pension transfer at the moment, .. er no Kelvin it’s quite a nice figure (Ohh and Murdoch did tell me eff off out of his office all the time, his PA, Dot, was really nice though)

  • 23 Al Cam August 29, 2020, 7:07 pm

    @ Simon T:
    My apologies. You are correct it is The Times & The Sun not, as I typed, the Times & the Sun. Wouldn’t mind but I still have my 1992 copy of The Times Guide to English Style and Usage edited by Simon Jenkins.
    My train commutes included the latter part of the Wapping dispute and the Great Storm – as it came to be known; which really did for poor old Michael Fish!
    Feels now like those were great times – but I think that might just be because we were all so much younger then!

  • 24 Neverland August 29, 2020, 7:14 pm

    I clicked on the Sun link for “EMERGENCY plans have been drawn up to protect the UK from the perfect storm of a winter second wave of Covid-19 coinciding with a No Deal Brexit”

    It looks like all of about four sheets of paper, which seems about right for this bunch.

  • 25 Simon T August 29, 2020, 7:32 pm

    @Al Cam my weirdest days at Wapping was not hiding on the bottom of a bus as people were trying to put scaffold poles through the windows (Jeez, I am a computer guy not a printer so no union for me). The interesting days were setting up Sky (errr we are newspaper people not wtf is that you want us to do, let’s find a err interesting Israeli company to do the cyber on it), and then setting up Fox News, yeah apparently my daughters say I should say “my bad” on that one.

  • 26 Al Cam August 30, 2020, 8:58 am

    @Simon T:
    Interesting times indeed!
    I too was lucky enough to have some memorable “adventures” throughout my career – most of which I look back on very fondly. Having said that, I guess we all had episodes we might rather forget.
    Best be careful not to turn this post into some sort of parody of the Python’s four Yorkshire men sketch!

  • 27 Andy J August 31, 2020, 9:48 am

    Hi @TI – our twins were born in 2005 so got the original vouchers plus we were lucky enough to be able to afford to put the family allowance in every month while it lasted. Back then the choices were much more limited with lots of very poor value “Stakeholder” schemes. I choose F&C Capital & Income Investment Trusts for them as pre Monevator wisdom Money Observer was my guide and I went along with their positive view on ITs. When our daughter came long in 2009 I switched all of them to the F&C Investment Trust. The boys have about 14K and she has 9K. By todays standards the OCF of 0.96% looks pricey but they’ve benefited from decent dividend yield. We’ve just started talking about what they do with them in a few years but staying invested is probably most likely. Albeit switched into a much lower cost global tracker.

    PS – Thanks for the Freetrade link. I realised after sign up that I’ll have to keep it outside of an ISA as still regularly paying into my II.co.uk ISA but will be useful as something different on the side!

  • 28 Mr Blue Shoes September 1, 2020, 7:02 am

    @PendleWitch

    My wife was the same. “What if the child is a drug addict when they turn 18?”. Nothing like having high hopes. We invested the govt money in a CTF for my oldest son, the other two missed out. We have then invested money monthly for our children using my wife’s isa allowance so we retain control. I appreciate this would have an impact if we were ever bankrupt or in some kind of means tested scenario.

    Ps, love the name, reminds me of home. I’m also from Pendle – but down South now.

  • 29 Pendle Witch September 1, 2020, 9:06 pm

    @Mr Blue Shoes, I put my faith in genetics. It’s working out, so far (!). I’m also far from home these days. Some things I miss, but not the rain 😉

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