All newborn babies in the UK nowadays receive Child Trust Fund vouchers from the Government worth at least £250. Parents must decide where to invest these vouchers for their children. The Child Trust Fund scheme was first introduced at the beginning of 2005 when vouchers were handed out to all children born on or after 1st September 2002. The Government's aim is to promote the idea of saving for children so they have a nest egg when they reach 18.
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How much will my child receive?
When you start receiving Child Benefit for your child, you will normally be sent a Child Trust Fund voucher for £250. If you are on a low income (that is your household income is not more than the Child Tax Credit threshold, currently £14,155 for 2006/07), you will receive an extra £250. Further vouchers for the same amounts will be sent out to children when they reach the age of 7.
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What do I do once I have a voucher?
You must decide what type of Child Trust Fund account you want to invest in. There are basically three of accounts you can choose from:
- Stakeholder accounts
- Cash savings accounts Share accounts
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How do they work?
All the accounts are tax free so no income tax or capital gains tax will be deducted from your child's savings but each type is invested somewhat differently.
- Stakeholder accounts - These accounts initially invest in a broadly based fund of UK company shares. Most are managed funds where investment managers pick the shares which they believe will perform best, though there are no guarantees that they will rise in value. Alternatively, an index tracking fund may be used which mirrors the price movements of shares which make up stockmarket indicies such as the FTSE 100 Index. When your child gets to 13, the money in these funds will be gradually moved into lower risk investments such as cash or bonds. This process is also described as lifestyling.
- Cash savings accounts - These are special bank or building societies accounts which pay tax free interest. Interest rates are variable. More interest may be paid if extra savings are added to the initial Child Trust Fund vouchers.
- Share accounts - These accounts give you a choice of other stockmarket investments including different types of investment funds, investment trusts or shares. The child's money can remain invested in these accounts right up to age 18.
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How much will you pay in charges?
One of the main differences between stakeholder and other types of Child Trust Fund accounts is that the charges on stakeholder accounts are capped at 1.5% a year. On others, providers can set their own charges. With cash savings accounts, charges are not explicit because they are deducted before interest rates are set. Charges on other share accounts vary considerably. Management charges on non-stakeholder investments funds are often 1.75% a year or more. But charges on investment trusts can be below 1% a year. When individual shares are purchased, there are the stockbrokers buying and selling costs to take into account.
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How to choose a fund
Every parent will want to choose the Child Trust Fund that is likely to produce the largest amount of savings for their child. Unfortunately nobody can predict which type of investment will perform best over the next 18 years. But they do involve different amounts of risk.
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Weighing up risk and return
On the face of it the lowest risk choice may appear to be a cash savings account. With a cash account, money cannot be lost and interest will be credited every year. But cash savings can't grow in value apart from through the addition of interest. This means the impact of inflation needs considered.
Inflation reduces the buying power of money and has recently been running at over 4% a year as measured by the Retail Price Index which means every year the same amount of money buys 4% less in goods or services. So if your child's savings are earning interest of, say, 5%, it means that after 4% inflation the "real" return is only 1%. Over the long term, returns on cash savings therefore are likely to be significantly diminished by inflation.
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What stockmarket investment offers
Stockmarket investments have historically produced better returns than cash over periods of ten years or more and have also kept ahead of inflation, so a stakeholder account or share account could provide your child with a larger nest egg at the end of 18 years. But share prices can fall, so there are no guarantees.
The general trend of share prices over the long term is upwards but they can fall sharply over the short term. These falls are unpredictable and can go on for several years even though historically share prices in general have always eventually risen again to even higher levels then before. The aim of stakeholder Child Trust Funds is to provide the best of both worlds.
Your child's money is invested mainly in shares initially so that there is the prospect of some real growth. A broad range of shares will be included in the fund to spread the risk and some providers include other investments too, such as bonds. Then from age 13 the money will be gradually moved into lower risk investments such as cash or bonds. This is designed to protect the investment from a sudden fall in the stockmarket as the child approaches his or her 18th birthday.
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Should you consider a share account?
With a share account, you will have a wider range of investment choice. Stakeholder funds will take a middle of the road approach and will tend to aim to produce returns roughly in line with the UK stockmarket. Share accounts will give you access to more specialist investments. This means the range of returns they produce is likely to be even wider than on stakeholder accounts. They could be higher than as you can choose funds that invest in particular types of businesses, such as smaller companies, or overseas shares, or even particular stockmarkets such as those of the high growth economies of China and the Far East.
In addition, there is no requirement for the money to be automatically moved into safer investments prior to the child's 18th birthday as there is with a stakeholder account (although you can opt for this not to happen even on a stakeholder account.) But these accounts could also involve more risk. Specialist funds tend to fluctuate more in value and investing in individual company shares, for example, could be particularly risky. If one company performs badly it might diminish the overall value of the child's investment significantly. On the other hand, there is nothing to stop stakeholder funds falling in value or performing poorly either.
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Do you have ethical or religious criteria for your child's investment?
Generally, investment managers choose shares on the basis of the profits they can make out of them rather than whether they agree the nature of a company's business activities. If you want to make sure your child's money is invested ethically, you can choose a share account fund which does not invest in companies involved in areas such as the production of alcohol, tobacco or arms. A Child Trust Fund based on Islamic values that invests on the principle of Shari'a law is also available.
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Will you making extra savings in your Child Trust Fund?
Whether you plan to top up your child's savings may also influence your choice of account. You and other relatives or friends are allowed to add up to £1,200 each year between one birthday and the next. Like the voucher, this money will benefit from being invested in a tax free account. By adding extra savings, it means you can also ensure that your children's savings grow into a really useful amount by the time they reach 18. But the minimum amounts you can add will vary. Stakeholder accounts must by law take top-ups from £10. Some cash savings accounts will take extra savings of as little as £1. Share accounts can set their own minimums. Top ups of under £50 or £100 may not be accepted.
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Where to buy them
Where you go to invest your Child Trust Fund voucher will partly depend on what type of account you want.
Stakeholder accounts - All providers must by law offer the option of a stakeholder account. Unfortunately they are not all the same. So even if you decide for the sake of simplicity you want your child to have a stakeholder account it makes sense to find out about where they are invested. But this isn't always easy because some providers offer very little information about their funds.
Two of the most straightforward stakeholder accounts are offered by Halifax and F&C Management. Halifax's account is linked to a FTSE 100 tracker fund which follows the share price performance of the UK's largest 100 companies, while F&C Management offers a low cost FTSE All Share tracker which follows the performance of UK companies of different sizes.
Other providers offer managed funds within their stakeholder accounts, so their performance will vary. HSBC's stakeholder account is linked to its HSBC UK Growth & Income fund, while NatWest uses the RBS Stakeholder Investment fund, and Engage has the Homeowners Investment Growth fund as its stakeholder fund. Family Investments employs leading investment managers New Star to run its stakeholder fund
Cash savings accounts - These are offered by a number of national and local building societies such as Britannia, Nationwide, Ipswich, Leeds and Skipton, as well as some local credit unions. If you are interested in a cash account it is always worth finding out what is available in your locality.
Share accounts - There are a wide variety of share accounts available. Liverpool Victoria, for example, offers a with profits option. Children's Mutual provides a range of investment funds to choose from offered by outside investment groups Gartmore, Insight, Invesco Perptual and UBS. F&C Management offers its own range of 13 investment trusts. If you want to choose your own shares you can go to a stockbroker such as Pilling & Co, Redmayne Bentley or The Share Centre. Ethical funds - For ethical Child Trust Funds, you can go to Family Investments or the Children's Mutual. Children's Mutual is the only provider that currently offers a Shari'a account.
How to invest.
Contact the Child Trust Fund provider of your choice and give them your child's voucher. You may also be asked to provide proof of your own identity.
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What happens if you forget about your voucher?
You have up to a year to invest the Child Trust Fund voucher - an expiry date is printed on it. If you don't, the Government will invest it on your child's behalf in a stakeholder account. A number of providers have volunteered to take on this business and your child's voucher will be allocated to one of them. You will be notified accordingly.
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What happens if you want to change the account?
Changing providers is easy if you decide you would like to transfer the money to a different Child Trust Fund account. Just contact the new provider you prefer and ask for a transfer form. Once you have provided the details the new provider will arrange the transfer on your behalf. You can also decide that the money in a stakeholder account is not transferred into safer investments when your child reaches 13. You will be informed in advance.
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Will more money be provided by the Government?
The Government has announced it will send out a further Child Trust Fund voucher of at least £250 when children reach seven years of age. A further sum will be added when they reach 13 but the amount has not yet been specified.
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Who controls the money in the account?
Normally a child's parent, or an adult with parental responsibility, will control the investment of the money. But from the age of 16, the child will be given control and could, for example, change providers at that point.
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Can money be withdrawn from a Child Trust Fund account?
No money can be withdrawn from a Child Trust Fund account until a child reaches the age of 18. Even the extra top up savings you put in yourself are locked away until that time. The money will become available to your child on his or her 18th birthday. The Government has placed no restrictions on how the money is spent.
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Can the money remain invested after my child's 18th birthday?
In future it will be possible for children to roll all the money in their Child Trust Fund into an Individual Savings Account (ISA). This money will not be subject to the usual maximum annual ISA allowance limit of £7,000. The advantage of doing this is that the money can continue to build up in a tax free environment until it is required.
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Last edited March 2007