If coming-of-age in 2020 was a film, it might be classified as a horror. Along with many cancelled holidays, a messy A-levels results day and an unforgiving job market, the new financial responsibility as an adult is the final horseman to bring an end to the innocent childhood. While all these seem to be quite daunting, there are silver linings. For a very long time the Government has been trying to encourage people to save more, and from a younger age. This is more than just talk – free money and generous saving opportunities have been offered to young people to fulfil their life goals, and you should not miss out on them.
Child Trust Fund and Junior ISAs
For some of Generation Z the starting point of their savings journey is a Child Trust Fund (CTF). This was a Government initiative that ran between September 2002 and January 2011 and provided parents with free vouchers of up to £500, per child who was born in the UK, to open a tax-free CTF savings account on behalf of them. Family, friends or the children themselves can continue saving into the account to boost the fund. In 2020/21 up to £9,000 can be saved into the account without tax charge. The children will then have full control of their account on their 18th birthday, which has started happening earlier this month.
Parents can’t remember where they opened your account?, Don’t worry, there is a simple request form on the Government’s website that can help you locate your lost funds. Even if your parents did not open an account, it would have been automatically set up by the Government, so it is worth checking.
If you know where your CTF is, congratulations! On your 18th birthday the account will become yours and you can decide what to do with the money. Options are straightforward: you can do nothing, cash out or continue investing it:
- No action: If you do not instruct your provider otherwise, your CTF savings will remain tax-free in a protected account. There’s usually an annual management charge.
- Cash out: A quick way to fund short term needs like paying for university tuition, purchasing your first car or going on a short trip.
- Invest: If you want to try investing some or all of the money elsewhere, it can be used to open an adult individual savings account (ISA). Different ISAs might be designed to support different life goals. Lifetime ISA for example, adds a 25% government bonus to your savings towards homebuying or retirement. Your CTF provider might offer these ISAs, but you can always explore options from other providers. You could also withdraw it and start saving it into a pension.
There’s also the option to transfer your CTF account into another investment product before your 18th birthday. The Child Trust Fund initiative was replaced by Junior ISAs (JISAs) in 2011, without the Government voucher. New CTFs can no longer be set up but existing CTFs can be transferred to a JISA before it matures. More providers offer JISAs than CTFs so there are more choices. JISAs sometimes provide better net returns so do shop around and see what’s best for you. One thing to bear in mind is that after a CTF is transferred into a JISA, it cannot be reversed.
Automatic enrolment
Once you join the work force, your first automatic enrolment (AE) pension will be a milestone helping you to save for retirement. For all workers between 22 years old and the state pension age who earn more than £10,000 per year, employers will have to enrol them into a pension scheme and contribute to it.
But you don’t have to wait until you are 22. If you earn more than £6,240 per year and are between 16 to 21 years old , you can request to join an AE pension too. This is made even easier for employers under the recently announced Kickstart program. Under this six-month job placement program for 16 to 24-year olds who are at risk of long-term unemployment, salary and minimum employer contributions towards AE pensions will be covered by the Government. If you get a placement under the scheme and are eligible for an AE pension, don’t feel shy to ask for opting in for one! We hope that soon, automatic enrolment will also cover more workers, especially younger ones. The Government has an ambition to reduce the lower auto-enrolment threshold to 18 years old, so more people can start saving earlier – we’d like to see this ambition become a commitment.
These are only some perks for those who start saving from a young age. In principle, the younger you start contributing to long-term saving products like pensions, the more they would grow. Saving into a financial product might sound quite intimidating at first, but practising will slowly become a habit. Ultimately these mini pots of golds can grow into vital support to dreams you didn’t think could be realised. Do give it a try!