A Confused.com guide to Child Trust Funds
If your son or daughter is set to celebrate their seventh birthday this month, they will be among the first to receive a present from the Government in the form of a top-up to their tax-free Child Trust Fund (CTF).
Launched in 2005 with the aim of giving young people a financial head start in life, CTFs were opened for all children born after 1 September 2002, with a £250 voucher (£500 for children from the poorest families).
Each child then receives another £250 instalment to their nest egg when they reach seven, with low-income families getting £500. To date, around 4.4 million* children have a CTF account.
Review your offspring’s nest egg
This top-up, paid directly into your child’s CTF savings account, will come as a welcome cash injection, but rather than sit back and do nothing, you should view this windfall as an opportunity to review the scheme you have set up. Some parents may not be aware that they can move their child’s account to a different provider at any time, and change the type of account.
Choosing a fund
When it comes to selecting a fund, there are three main types of tax-free account to choose from: a “stakeholder” or “non-stakeholder” fund, both of which are shares-based, or a deposit account, which is cash based.
- Stakeholder funds invest in equities before switching to less risky investments, such as bonds and cash, as the child reaches their teens through what is known as a “lifestyling” element; maximum annual fees are capped at 1.5 per cent.
- Non-stakeholder funds carry higher charges than stakeholders, but aim to generate more growth through riskier stock market investments.
Deposit accounts are run by banks and building societies and are very similar to ordinary savings accounts - so there is no risk of loss.
If you fail to invest the voucher within a year of the birth of your child, the Government will select a default stakeholder fund for you instead.
Check your fund’s performance
Given that your son or daughter’s CTF has been growing for seven years now, this is a really good time to check its performance. Providers normally send out an annual statement, so you can use this to monitor how well your chosen fund is doing. If you’re not happy with its performance, consider making a switch to another provider.
Cash accounts offer a safe haven
The rates paid on cash accounts have taken a battering over the last few months, but deposit accounts do remain a safe and simple savings option - and may appeal to parents who want to gives shares a miss, given the recent stock market turmoil. For those who do want to invest in cash, Hanley Economic building society is currently paying 5%.**
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Shares beat cash over the longer term
Nonetheless, despite recent equity market turbulence, it’s worth remembering that historically, share-based savings schemes have produced better returns than cash over the long term. This is because with cash, your capital may be secure, but its real value could be eaten away by inflation.
As a parent, you need to consider the long-term horizon, and the fact the CTF runs for 18 years. Even for those turning seven this year, there are still 11 years until their fund matures - which should potentially be long enough to ride out the peaks and troughs in share values. Further, one of the best times to buy equities for the long term is often when markets have been through a tough patch.
Take the time to top-up
Once you have chosen the right savings account for your son or daughter, you can then help boost the value of the fund by adding regular contributions. Family and friends can currently top-up the accounts up to a maximum of £1,200 each year; the money will then grow tax-free until the child’s 18th birthday.
Even if you only have a balance of £500 from the two vouchers combined, you still have 11 years to go - which is plenty of time to get into the savings habit. And, if parents and grandparents clubbed together to make a £50 monthly contribution from the age of seven, this could still give a pot of around £9,750 when the child reaches 18.†
Turning 18
While it is up to the child to decide how to spend the money when they turn 18, most parents hope their children will be financially responsible enough to use their nest eggs wisely - to pay for university fees, training, or a deposit on a first home.
Notes:
* HM Revenue & Customs
**Rates correct as of 9 September 2009.
†CTF provider - The Children’s Mutual.
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