Defaqto

Child Trust Funds

The parents of all newborn babies born on or after 1st September 2002 are entitled to a £250 voucher from the Government to invest in the tax free Child Trust Fund or (CTF).

Poorer families receive £500, but whichever amount you receive, as a parent you are required to invest these vouchers into cash or an investmentl fund on behalf of your child.

The idea of the CTF is to encourage parents to save on behalf of their children to provide them with a nest egg when they reach 18. Parents and relatives can add up to £1,200 to the fund each year from their own pockets to boost the fund further and which will also roll up tax free.

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, 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.

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

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.

• Stakeholder accounts – these accounts 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 indices such as the FTSE 100 Index. When your child reaches age 13, the money in these funds will be gradually moved into lower risk investments such as cash or bonds. This process is known 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 the account is boosted with  extra savings by parents and relatives (up to £1,200 a year).
• Share accounts – these accounts give you a choice of other stock market investments including  investment funds, investment trusts or shares. Your child’s money can remain invested in these accounts up to age 18.

How much will you pay in charges?

Charges on stakeholder accounts are capped at 1.5 per cent a year. On the other CTF accounts, providers are allowed to set their own charges.

With cash savings accounts, charges are not explicit because they are wrapped up in the interest rate paid. Charges on other share accounts vary considerably. Management charges on non-stakeholder investments funds are often 1.75 per cent a year or more. But charges on investment trusts can be as little as 0.5- 1 per cent a year. When individual shares are purchased, there are buying and selling costs levied by the stockbroker and stamp duty to pay.

Which type of account should I choose?

Most parents will want to choose the CTF that is likely to produce the largest returns for their child. 

Cash savings accounts

The lowest risk choice is normally 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 per cent a year as measured by the Retail Price Index which means every year the same amount of money buys 4 per cent less in goods or services.

So if your child’s savings are earning interest of, say, 5 per cent, it means that after 4 per cent inflation the ‘real’ return is only 1 per cent. Over the long term, returns on cash savings  are therefore likely to be significantly diminished by inflation, but you will always get your original deposit back. Bank and building society deposits of up to £35,000 are protected a deposit protection scheme.

Stakeholder accounts

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 stock market as your child approaches age 18.

Share accounts

With a share account, you will have a wider range of investment choice and have access to more specialist investments.

This means the range of returns is likely to be wider than on a stakeholder account, so there is greater risk that the fund might over or under perform your expectations.

In addition, there is no requirement for the money to be automatically moved into safer investments prior to your 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.)

Specialist funds tend to fluctuate more in value and investing in individual company shares can 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.

Do you have ethical or religious criteria for your child’s investment?

Investment managers normally choose shares on the basis of the maximum profit they can make rather than whether they agree with the ethics of the 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 invests on an ethical or environmental basis.

This means it will not invest in certain companies involved in areas such as the production of alcohol, tobacco, armaments or which invests in companies which have environmentally friendly policies..

Will you be making extra savings in your Child Trust Fund?

You and other relatives or friends can top up a CFT with up to £1,200 each year. 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 significant amount by the time they reach 18.

But the minimum amounts you can add 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 minima. Top ups of under £50 or £100 may not be accepted.

How do I invest my CTF voucher?

Where you go to invest your CTF voucher will depend partly on what type of account you want.

Stakeholder accounts

All providers are required to offer the option of a stakeholder account. Unfortunately they are not all the same. So even if you decide for the sake of simplicity that 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 Asset 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 all UK listed companies.

Other providers offer managed funds within their stakeholder accounts. 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.

Share accounts

There is a wide variety of share accounts on offer. LV=, for example, offers a with profits option. Children’s Mutual provides a range of investment funds run by external fund managers such as 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.

For ethical CTFs, 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 do I invest?

Contact the CTF provider of your choice, stating which fund you wish to invest in.  When you send in your child’s voucher, you may also be asked to provide proof of your own identity.

What happens if I forget to invest the voucher?

You have up to a year to invest a CTF 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.

What happens if I want to change the account?

If you would want to transfer the money to a different Child Trust Fund account, contact the new provider of your choice and ask for a transfer form. Once you have provided the details, the new provider will arrange the transfer on your behalf.

If you don’t want the money in a stakeholder account switched into safer investments when your child reaches 13, you should inform your existing provider in writing.

Will more money be provided by the Government?

The Government has said it will send out a further Child Trust Fund voucher of at least £250 when children reach age 7. A further sum will be added when they reach 13, but the amount has not yet been specified.

Who controls the money in the account?

Normally you, the parent, or an adult with parental responsibility, will control the investment of the money. But from the age of 16, your child will be given control and could, for example, change providers at that point.

Can money be withdrawn from a Child Trust Fund account?

No money can be withdrawn from a CTF account until a child reaches age 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.

Can the money remain invested after my child’s 18th birthday?

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 £7,200. The advantage of doing this is that the money can continue to build up in a tax free environment until it is required.