Guides: investments
Child trust funds
With the cost of bringing up children forever on the rise the Government decided in 2002 to provide parents with a special savings vehicle designed to help them create a nest egg for their offspring.
As a consequence of this decision parents of all newborn babies, born on or after 1 September 2002, are entitled to a £250 voucher from the Government to invest in a 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 a cash or investment fund on behalf of your child.
Parents and relatives can add up to £1,200 in aggregate to the fund each year, all of which rolls up tax free, until the child's 18th birthday. Parents run the fund on behalf of the child until their 16th birthday. At age 16, the fund is handed over to the child to run until their 18th birthday, at which time the fund is legally theirs to do with as they wish.
How much will my child receive?
When you start receiving child benefit, you will also receive a CTF voucher for £250. If you are on a low income (namely, your household income is not more than the child tax credit threshold), you will receive an extra £250.
In addition, further vouchers – for the same amounts – will be sent out when your child reaches the age of seven.
What do I do with the voucher?
You must decide what type of CTF account you want to invest in as there are three types of account to choose from:
Stakeholder
This type of account invests in a broadly based fund of UK company shares. Most are managed funds where investment managers pick the shares they believe will perform best; although there are no guarantees that they will rise in value.
Alternatively, an index tracking fund may be used. This mirrors the price movements of shares which make up a stock market index, such as the FTSE 100 Index (100 largest UK companies). When your child reaches age 13, the money in these funds will be moved gradually into lower risk investments, such as cash or bonds. This process is known as ‘life styling’.
Remember!
- Charges on stakeholder accounts are capped at 1.5% a year
- Minimum additional contributions must be set at no more than £10.
Cash savings accounts
The lowest risk choice is normally a cash savings account, although cash savings can’t grow in value apart from through the addition of interest and compound interest. This means the impact of inflation needs to be considered and if there is deflation, interest rates could turn negative. However, bank and building society deposits of up to £50,000 are protected by the Financial Services Compensation Scheme, in the event that a bank or building society goes bust.
Remember!
- Charges are implicit, as with standard savings accounts
- Minimum additional investments are set by the provider and will vary.
Share accounts
With a share account, you will have a wider range of funds and access to more specialist investments. But these investments will not necessarily be moved automatically into safer assets prior to your child’s 18th birthday (as with 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 damage the overall value of the CTF significantly.
Remember!
- Annual charges are not capped, but will rarely be much in excess of the stakeholder cap of 1.5%
- Minimum additional investment is set by the provider and will vary.
- If you do nothing with the voucher, a CTF stakeholder account will be selected for your child by the Government.
Ethical or religious investment criteria
Investment managers normally choose shares on the basis of the maximum profit they can make rather than whether they agree with the ethical policies of the company. If you want to ensure your child’s money is invested ethically, you can choose a share account fund which invests on an ethical or environmental basis. Shari’a accounts are also available which stick to Muslim principles and will not invest in areas such as alcohol, tobacco and gambling.
Who offers stakeholder accounts?
All providers offering CTFs are required to offer the option of a stakeholder account. These can vary as to how the money is invested. Some offer index tracking funds, while others offer ‘managed funds’ or ‘income and growth’ funds as their stakeholder funds.
Who offers cash savings accounts?
These are offered by a number of national and local building societies and banks.
Who offers share accounts?
There is a wide variety of CTF share accounts on offer with a large choice of investments run by different investment managers. Many outlets are linked to young children, from the maternity ward at hospital, through to retail stores and most of the main supermarkets.
Switching account
If you would want to transfer the money to a different CTF 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.
Withdrawing money from a CTF
No money can be withdrawn from a CTF account until the child reaches age 18. Even the extra top-ups you put in yourself are locked away until that time. After the child’s 18th birthday there are no restrictions on how the money is spent.
Investing after a child’s 18th birthday
Your child can roll all the money from their CTF into an individual savings account (ISA) at age 18, which has similar tax breaks. This money will not be subject to the usual maximum annual ISA allowance limit of £10,200 (from 2010-11). The advantage of doing this is that the money can continue to build up in a tax free environment until it is required.
Which type of account do I choose?
The first thing to consider is that this money is not yours, it is your child’s; so, your tolerance to risk may not be the same as theirs. The second thing to consider is the term of the investment, as 18 years is a long time in investment terms, and riskier assets have a good chance to outperform cash.
Consider handing over a cash account at 16 to your child that has only risen in value from £500 to say £700 through accumulation of interest. Then consider the effect as they begin to find out that their friends’ parents invested in the stock market and that these accounts are worth double or treble what theirs is. So, if you are not considering adding to the account over time, it would be difficult to justify sticking with cash.
If annual limits are going to be used each year, there is a case for having a well diversified portfolio that includes all types of investment. Of course, if you have been adding to the figure over time they have no grounds for complaint whatever the choice.
