The Child Trust Fund is a Government child savings scheme, set up for all children receiving Child Benefit who wereborn on or after 1 September 2002. CTFs will be available from April 2005.
Under the initiative the Government will provide a minimum of £250 in the form of a voucher, which will be sent out automatically for eligible children during January and February 2005, as set out below.
The amount awarded will vary, depending on the child's date of birth, to compensate for the time that has elapsed between their birth and the introduction of the account.
Families in receipt of full Child Tax Credit or certain benefits when Child Benefit was first paid will receive an additional payment into their accounts (see below).
In April 2005, or sooner, the voucher should be presented to the chosen CTF provider to open a tax free account on behalf of the child. Vouchers will be valid for one year, and if an account is not opened during that period, the Inland Revenue will open a Stakeholder account on behalf of the child and provide details to the parents.
Parents, grandparents and friends will be allowed to make additional deposits up to a maximum of £1,200 each year. When the child reaches the age of 7, the Government will donate a further sum, currently proposed at a minimum of £250, to the account. At age 16 the child can begin to make decisions about how the money is managed. No withdrawals are permitted until the child is 18.
Once the child is 18 the CTF will close and the resulting funds will be available to the child. This coming of age bonus can be used for whatever purpose they desire, university fees, deposit for a house, wedding expenses etc.
Choice of Investment
There are three types of investment to choose from depending on attitude to risk; a cash deposit account available from a bank or building society, an equity based investment provided by a Friendly Society, Insurance Company or Investment Fund Manager, or a Stakeholder account offering a 'lifestyled' equity option.
Each has its own benefits and pitfalls. A decision taken wisely now can have a dramatic effect on the sum eventually realised, giving the child a valuable boost into adulthood.
A cash based account may appear to be the safest option, and of course would not attract any charges, but if interest rates are low, inflation could erode any returns and it may not perform well over the longer term.
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Stocks and shares, perhaps the most risky investment strategy, would attract charges, but in return has the potential for higher returns over the longer term. Historically stocks and shares usually outperform deposit accounts.
Finally, the Government-preferred Stakeholder, which initially is invested in stocks and shares but will be moved to lower risk investments at age 13 to minimise any sharp falls in the stock market jeopardising the investment. Under the Government Stakeholder rules, annual charges are capped at 1.5%.
Providers of CTF have to register with the Government, a complete list of which can be found on www.hm-treasury.gov.uk. As yet few institutions have elected to provide a cash option, a fact borne out by Moneyfacts research.
Andy Heseltine, Product Manager: Savings and Investments for West Bromwich BS explains why: "CTF cash deposit funds won't be made widely available for two main reasons. First, many organisations do not yet have the will or the technical capability to deliver this non-stakeholder product and secondly, historically over the longer term equity funds (even tracker types) have generally outperformed cash deposit accounts."
Other institutions are more optimistic. Abbey, Nationwide BS, Furness BS, Yorkshire BS, Britannia BS, Hanley Economic BS, Ipswich BS and Skipton BS are amongst those providing cash based options, as well as equity based products.
Jennifer Holloway, Head of Media Relations for Skipton BS says: "The CTFs complement our existing savings account for children and offer parents a choice of where to invest for their children, of all ages. However, a lot of the success of CTFs, with regards to their take-up, will depend on how well the Government can raise awareness of them with the public. There is also a need to explain clearly the difference in risk between putting the money into a guaranteed interest cash account as opposed to an equity based product."
Many Building Societies will act as introducers by offering an equity based product via a financial partner, such as a mutual company, although some institutions such as HSBC will invest in their own equity fund.
Concerns over whether parents will make additional contributions may have affected the popularity of CTFs, as without additional injections of cash from parents, etc, the final sum is likely to be disappointing.
Paul Morrish, Director of Personal Customers at Barclays, commenting on equity based products, said: "We calculate that if you don't add anything to the original £250, it will be worth only £421 when your child reaches 18. But we estimate that a wedding may cost £24,799 in 18 years, while you will need £10,762 for a new car and £25,240 to put down a 10% deposit on the cost of an average home."
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