The Child Trust Fund

What is a Child Trust Fund?

The Child Trust Fund (CTF) is a Government savings scheme which was introduced on 6 April 2005. It’s open to children receiving Child Benefit who were born on or after 1 September 2002.

Under the CTF scheme, the Government will provide you with a minimum of £250 in the form of a voucher, which is used to open a tax-free account on behalf of the child.

It’s a great way to get you and your child into the habit of saving. If you make regular payments into the account, by the time your bundle of joy reaches the age of 18, they could have built up a tidy little sum, giving them a great start when they most need it!

Something for nothing!

It’s not every day that the Government gives you something for nothing, so make the most of it and don’t leave your voucher to gather dust on the mantelpiece!

Key points about Child Trust Funds:

• Once the account is opened, parents, grandparents and friends can make additional deposits to the account up to a maximum of £1,200 each year (but remember no withdrawals are permitted until the child is 18). 
•  When the child reaches the age of seven the Government will donate a further sum of money. This is currently proposed at a minimum of £250. 
• At age 16 the child can begin to make decisions about how the money is managed and, once they reach 18, the Child Trust Fund will close and the balance is transferred to them. 
• If a Child Trust Fund account is not opened before the voucher expires (12 months from the date of issue) HM Revenue & Customs will open a stakeholder CTF account with a provider of their choice.

Types of Child Trust Fund investment

There are three types of investment to choose from, each has its own benefits and pitfalls:

1. A cash-based account with a bank or building society is the safest option. It attracts no charges but if interest rates are low inflation could erode any returns and it may not attract a great deal of interest over the longer term. Bearing that in mind, it should be noted that you can currently obtain interest rates of up to 6.25% (annual equivalent rate, Sept. 2006).

   Low risk obviously means a lower rate of return but if you want a safe home for your child’s savings and are not too worried about the interest rate, these are ideal. For the latest best buy cash CTFs, visit Moneyfacts.co.uk

2. The government-preferred stakeholder option. This is initially invested in stocks and shares but is moved to lower risk investments at age 13 to minimise any falls in the stock market which might jeopardise the investment.

   These have outperformed cash CTFs to date and are suitable for the more risk-wary parents. The returns over the last 12 months (Sept. 2006) are encouraging but the usual warning that 'the value of investments can fall as well as rise' applies. Stakeholder accounts come with no initial charges and annual management fees are capped at 1.5% of their value.

3. An equity based investment in stocks and shares provided by a friendly society, insurance company or investment fund manager.

   These funds offer the potential of greater returns but they’re also considered more risky. Also, as they are not stakeholder products, there is no maximum initial fee or annual management fee. These products are more suited to the serious investor.

Finally, and most importantly, if you are in doubt about the best option for your child's savings, time spent now discussing the matter with an independent financial adviser could prove to be a worthwhile exercise, leading to a tidy nest egg for your son or daughter on their 18th birthday.