A $12bn trust fund for British teenagers is ready to raid
Child Trust Funds were enacted in 2005 to provide youth with a tax-free windfall to start their lives
After 15 years, a $12 billion (Dh44.1bn) trust fund is finally ready to be raided.
British teenagers turning 18 on Tuesday will begin receiving payouts from an experimental savings programme enacted when Tony Blair was prime minister – and Harry Potter and the Goblet of Fire was the world’s No 1 movie.
Child Trust Funds were set up by the state with initial grants ranging from £250 (Dh1,232) for children in well-off families to £500 for those in low-income households.
They provide every person born in the UK between September 1, 2002, and January 1, 2011, with a tax-free windfall to start their adult lives.
The 18-year-olds will have access to account balances that range from about £1,000 to £70,000 each, depending on how they were managed, according to estimates by Moore Kingston Smith, a London accounting company.
With about 55,000 people redeeming their Child Trust Funds every month until 2029, the programme is poised to affect the financial lives of a generation of young Britons.
Officials in other countries plan to introduce similar initiatives, as the economic turmoil sparked by the coronavirus crisis prompts a fresh look at universal basic income and other forms of direct-cash payments as social welfare.
Last week in the US, New Jersey Governor Phil Murphy proposed granting children born in the state a $1,000 state-funded nest egg.
The cash is a welcome dose of good news in an otherwise terrible year for British teenagers. Many high school students in the UK have had to cope with cancelled school terms and anxiety about their future, after a government plan to set final grades for graduates went haywire in the pandemic.
If young people understand how it’s invested, it will give them a good idea of the long-term growth potential.
Sarah Coles, personal finance analyst at Hargreaves Lansdown
While 529 accounts in the US earmark funds for college, Child Trust Fund holders can spend their money however they like.
“It’s quite exciting, isn’t it? I’ll keep it in my savings account to help pay for university and keep it as cash,” said Sasha Brealey, a London high school student who will turn 18 on September 19.
"I don’t know enough about the stock market, so I would probably do something quite stupid if I invested it.”
If left alone, a Child Trust Fund will automatically morph into an Individual Savings Account, which is tax-free and currently yields a 3.5 per cent return, according to Hargreaves Lansdown.
Sarah Coles, a personal finance analyst with the London investment company, said the vast majority of younger savers tend to maintain such accounts well after they mature.
Still, she urged parents to chat with their teenagers about their savings long before it is time to make such a decision.
“If young people understand how it is invested, it will give them a good idea of the long-term growth potential,” Ms Coles said.
“It can help build a sense that their money has been working hard for them, so they need to treat it with respect.”
Launched in 2005, the Child Trust Fund programme grew out of an effort to provide young people with a material stake in society and address inequality.
Many conservatives argued the “baby bonds” initiative amounted to a universal state handout that would be a waste of money.
Leftists disliked the role played by the securities markets in the programme and favoured cash benefits.
The funds were set up like 401(k) accounts, and parents were encouraged to make regular contributions, which are now capped at about £9,000 per year.
The money could be invested in the stock market or more conservative cash savings accounts. Teenagers began to manage their funds when they turned 16.
The British tax authority opened accounts on behalf of children whose parents did not act.
Over the years, officials have lost track of more than 1 million account holders as they moved residences or changed addresses, stranding £2bn in funds, according to The Share Foundation, a charity that’s working to help sort out the mess.
The insights gained from the Child Trust Fund programme “should help us shape new policies to promote opportunity and resilience among those coming of age in the 2030s", said Gavin Kelly, the chair of the Resolution Foundation, a London think tank, and one of the architects of the programme.
“After all, they are going to need all the help they can get.”
Updated: September 2, 2020 03:34 AM