Automatic enrolment from 18 and the green recovery…do child trust funds fit in this puzzle?
In 2017 the AE review suggested, amongst other things, that automatic enrolment starts at 18. We’re still some years off these recommendations becoming legislation, and the impact of Covid-19 will only push that date one way, as we look to reduce financial burdens on employers. But, in September 2020 the first child trust funds will mature as the account holders reach 18.
Child trust funds were introduced in 2002, giving every child born between 1 September 2002 and 2 January 2011 up to £500 to be invested with an approved provider (there are around 70 approved providers in the UK today). The scheme was abolished in 2011 and replaced with the launch of Junior ISAs.
In 2012, the last time official figures on the amount invested in child trust funds were produced – there was £4.89bn invested across 6.1 million accounts. Meaning assets of around £600m from 800,000 accounts will mature each year, across an eight year and four month window.
At maturity the account holder can do as they please with the money – move it to any other bank or savings account, transfer it to an ISA and retain the tax-free status or take it all as cash. However, at this point no further funds can be saved and it has to be transferred to a different account to continue saving. And the transaction must be done all at once.
What about putting it in a pension?
Could this option bridge the four year gap of being eligible to work, but not automatically enrolled? Absolutely. But with unemployment set to be at an all-time high with the younger generation hardest hit, the likelihood of them tying up money for what will seem like forever is pretty slim. If only we had an emergency access option to pensions!
An additional £600m per year for the green recovery…
However, all is not lost. Matured child trust funds can be transferred into a new ISA account – either cash or stocks and shares without breaking the annual £20,000 limit. Keeping savings invested will give the funds a chance to recover and avoid the crystallisation of losses.
Last year the government consulted on maturing child trust funds and concluded that investments should remain in a protected account and retain their tax advantage status until an instruction is received from the account holder.
A protected account could be a stocks and shares ISA, so there is still hope for the green recovery and getting young adults interested in where their money is invested.
Of course there’s a data angle!
On average 33% of the population moves home every 4 years, conservative estimates say around one in six child trust fund accounts are now lost. That’s over 130,000 18 year olds that need to be traced each year.
As soon as the account holder reaches 18, the account is theirs. Any registered contact held by the provider will not be able to give instructions for the account – making the tracing exercise one step removed. So, providers really need to crack on with tracing parents (the most likely contact on the fund), as tracing an 18 year old without a credit rating, mortgage or tenancy agreement will be that much harder.
There’s a pensions angle too
If child trust fund providers don’t manage to sort their data and trace the account holders – pension providers should think about communicating with new members as they join who are born between 1 September 2002 and 2 January 2011. These are all the members that may well hold a lost child trust fund and they may well want to add these savings to their new retirement pot – especially if the pension provider will help to trace and transfer their lost fund!