Definition: Child Trust Fund (Baby Bond)
A Child Trust Fund (CTF), commonly referred to as a “baby bond,” was initiated by the UK government as a tax-efficient savings account specifically for children. This scheme was introduced on 6 April 2005 to encourage long-term savings habits among young people and ensure they had a financial foundation as they transitioned into adulthood.
Key Features:
- Initial Government Contributions: Each child born on or after 1 September 2002 received an initial sum of £250, increased to £500 for children from lower-income families.
- Subsequent Contributions: The same sum was provided at birth for children born after the introduction date.
- Parental and Third-Party Contributions: Parents, guardians, and others could contribute up to £1200 per year into the fund tax-free.
- Maturity: Funds were set to mature when the child reached the age of 18.
- No New Accounts Post-2010: Following a policy change in 2010, no new Child Trust Funds were created after this date.
Examples
Example 1:
In 2005, Jane was born to a family whose income qualified her for the higher initial contribution from the government. Thus, Jane’s Child Trust Fund started with £500. Jane’s parents and grandparents contributed an additional £1000 each year. The fund accrued interest and investment growth over the years, maturing into a substantial sum when Jane turned 18.
Example 2:
Mark, born in 2009, received the standard £250 government contribution. His parents contributed £600 each year, utilizing the tax-free allowance. By the time Mark turned 18, his fund had grown, providing him with a significant sum to use towards university costs or a deposit for his first home.
Frequently Asked Questions
What was the purpose of the Child Trust Fund?
The main objective was to ensure every child had a financial asset at the age of 18, thereby encouraging long-term savings and financial education from a young age.
Can new Child Trust Funds be opened today?
No, the scheme was closed to new accounts in 2010 following a government policy change. Instead, Junior ISAs were introduced as an alternative.
Are the existing Child Trust Funds still active?
Yes, existing Child Trust Funds are still active, and the accumulated funds can be accessed by the account holder when they turn 18.
Can contributions still be made to existing CTF accounts?
Yes, contributions can be made to existing accounts within the annual tax-free limit.
What happens if the child’s parents do not top up the fund?
The Child Trust Fund will still grow through interest and investment returns, albeit at a slower rate compared to accounts that receive additional contributions.
Related Terms
Junior ISA
A Junior ISA is the alternative savings vehicle introduced post-2010, offering a tax-efficient way for saving for children’s future, similar to the Child Trust Fund.
Tax-Efficient Savings
Savings accounts that offer tax benefits, reducing or eliminating taxes on interest or investment returns, fostering better saving habits.
Investment Account
An account specifically used for investing in various financial instruments such as stocks, bonds, or mutual funds, aiming for growth over time.
Online References
Books for Further Studies
- “Personal Finance For Children: Teaching Your Kids About Money Management” by Myron E. Magnuson
- “The Financial Times Guide to Investing for Income” by David Stevenson
- “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy” by Thomas J. Stanley and William D. Danko
Accounting Basics: “Child Trust Fund (Baby Bond)” Fundamentals Quiz
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