From September 2009, the Government is making the first Child Trust Fund payments to 7-year-olds. Children will receive a payment of £250 into their CTF account.  A further payment of £250 will also be made for children in lower-income families, and children in care.

The Government payments are designed to:

• Help kick-start families’ saving for their children;
• Strengthen the savings habit of future generations;
• Promote financial education; and
• Ensure that at age 18 every child will have access to a financial asset

 Background

The Labour Government introduced the Child Trust Fund (CTF) in April 2005.

When a child is born, a CTF voucher for £250 is sent to parents automatically once they have claimed Child Benefit.  If a child is in a lower-income family they will also receive an additional £250  (this will go to children in families eligible for full Child Tax Credit  - those with a household income of £16,040 or below in 2009/10). 

It was backdated to cover all children born from 1 September 2002 onwards. 

Children who reach the age of 7 from 1 September this year will receive the second round of Government payments – as announced in Budget 2006.

At the age of 7, each child will receive a further £250 payment from the Government.  Again, children in lower-income families and children in care will receive an additional £250.  Age 7 payments are paid directly into the Child Trust Fund account by HMRC.

When children reach the age of 16, they take control of accounts, allowing them to invest the money as they wish. The money is locked in until they reach 18.  There are no restrictions on the use of the money at 18 - young people are best placed to decide on use. The Government has announced that Child Trust Funds will be able to roll over into an ISA on maturity, enabling young people to continue to save tax-free. 

The Government also provides an extra £100 per year for every child who spends the year in care, in order that their Child Trust Fund provides a more significant asset for them to access on entering adult life.

At Budget 2009, the Government announced that it will contribute an additional £100 per year to the Child Trust Fund accounts of all disabled children, with severely disabled children receiving £200 per year.  Payments will start in April 2010 for children with a CTF account.

Key facts

• Over 4.4 million children have a CTF account.

• The total value of savings held in CTF accounts is currently around £2bn

• Over 700,000 7-year-olds per year will benefit from the age-7 payments that start this month.

• Around three-quarters of parents actively open their child’s CTF account after their child is born. But no child misses out – if parents haven’t used their voucher within 12 months, Government opens a stakeholder account on child’s behalf

• Around one-quarter of children receive contributions from parents, grandparents, family and friends into their CTF account.  Up to £1,200 per year can be saved tax-free.

How much could each child’s CTF be worth when children reach 18?

Together with the Government payments, families saving as little as £10 a month into their child’s account could provide their child with a nest egg of an estimated £4,500 at age 18.  This will be even higher for children in families with low incomes or for disabled children, who receive extra contributions from the Government.

An online calculator is available at www.childtrustfund.gov.uk