Children Trust Fund

Category: Savings
Date: 10/9/2006 4:19:48 PM

A recent moneyfacts.co.uk user poll revealed that only 51% of people are aware of child trust funds and how they work. CTFs can provide a useful financial start to children as they reach adulthood, so to ensure you are not missing out we have provided an overview of the main points.

The child trust fund (CTF) is a Government savings scheme that came into effect on 6 April 2005. It is available to children receiving child benefit who were born on or after 1 September 2002. Under the initiative the Government provides a minimum of £250 in the form of a voucher. This is presented to one of the child trust fund providers, to open a tax-free account on behalf of the child.

Child trust funds - key features at a glance

• Additional deposits, up to a maximum of £1,200 each year, can be made by parents, grandparents and friends
• When the child reaches the age of seven, the Government will donate a further sum, currently proposed at a minimum of £250
• The account is opened by a parent or guardian and once the child reaches the age of 16 they have to become the registered contact and 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 made available to them
• If an account is not opened before the voucher expires (12 months from issue) the HM Revenue & Customs will open a stakeholder CTF account.

Child trust funds - types of investment

There are three types of investment to choose from, depending on registered contact's 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;

• A stakeholder account offering an equity option.
  
  Each has its own benefits and pitfalls. A cash-based child trust fund account may appear to be the safest option, attracting no charges, but if interest rates are low, inflation could erode returns diminishing the fund's real value and the account will perform poorly.
  
  Stocks and shares provide perhaps the most risky investment strategy and attract charges. In return they have the potential for higher returns over the longer term. However, there is always a risk as the value of shares can fall as well as rise.
  
  Finally there is the option of the Government-preferred stakeholder account, which is initially invested in stocks and shares but will be moved to lower risk investments as the child reaches age 13 to minimise any falls in the stock market, jeopardising the investment. Charges on these are limited to 1.5% a year.

You can only open one child trust fund account but you can switch accounts if you wish to do so. If you have a stocks and shares investment there may be charges for doing this, as the investments have to be sold.