Q&A: Choosing a Child Trust Fund
 Children take control of the investments at 16 |
The Child Trust Fund, a government-savings scheme which gives parents £250 vouchers to invest on their children's behalf, is open for business on 6 April. Many parents - who are entrusted with investing the funds until their children reach 16 - may be struggling to know where they should invest.
Here is a guide to the scheme and what to look out for.
What's it all about?
The Child Trust Fund is a government-savings initiative, aimed at encouraging children to save and to help them get a "better start in life".
The money cannot be accessed until the child reaches 18, although at the age of 16, the child will take over the responsibility for managing the account themselves.
 | HOW MUCH WILL YOUR CHILD RECEIVE?* 01/09/2002 to 05/04/2003: £277 06/04/2003 to 05/04/2004: £268 06/04/2004 to 05/04/2005: £256 06/04/2005 onwards: £250 *Parents of families on low incomes receive an additional £250 |
Every child born in the UK on or after 1 September 2002 will get at least £250 as a starting voucher.
Families on low incomes should receive an additional £250.
Children born between 1 September 2002 and 5 April 2005 will get slightly more to take into account the fact that Child Trust Fund accounts are only available from April 2005.
The government will also top up accounts on the child's seventh birthday. Plans for another payment when children turn eleven are currently being discussed.
Can I invest more?
Yes. Every fund may also be topped up by families or friends, up to a maximum limit of £1,200 a year.
There will be no income tax or capital gains tax to pay on the account.
What do I do with my voucher?
Two million vouchers have been issued since mid-January to parents of children born after 1 September 2002.
This will be followed each month by the issue of 60,000 vouchers, one for each new-born baby.
Parents can't spend the money or pay it into an ordinary savings or investment account. It must be invested by parents into a Child Trust Fund, run by an authorised Child Trust Fund provider.
Parents' right to choose a provider expires one year after the voucher has been issued. At that point the Inland Revenue will pick a fund.
Parents who haven't received a voucher should contact the Child Trust Fund helpline (details on right). All parents have to do to get a voucher is claim Child Benefit.
But there are so many providers, how do I choose?
The Child Trust Fund is a very simple savings concept, but choosing the most suitable home for your voucher may prove taxing for many parents.
| WHAT IS A FRIENDLY SOCIETY? They have no shareholders and are owned and managed by their members They have a long tradition, growing in popularity during the nineteenth century. People invested in these societies to protect themselves and their families from hardship in the absence of the welfare state Friendly societies now provide financial products, notably pensions, healthcare, insurance and banking and some specialist tax-free products |
This is because there are a lot of options.
There are more than 70 different providers and distributors, including banks, friendly societies and fund managers.
Providers range from the Ancient Order of Foresters Friendly Society and the Police Assurance Society to bigger High Street names, such as Halifax and Nationwide.
Parents should have received provider details in their information packs. Alternatively, a full list of providers can be found on the government's Child Trust Fund website.
What's the difference between a savings, stakeholder and share account?
There are three different types of account to choose from: savings, stakeholder and shares.
The simplest and safest option is to deposit your voucher into a straightforward cash deposit savings account.
| STAKEHOLDER: KEY FEATURES Penalty-free transfers between accounts and Child Trust Fund providers (except for stamp duty and dealing expenses) Minimum subscriptions of £10 'Lifestyling' An annual management charge capped at 1.5% of the fund's value |
The investment performance of the account will depend on interest rates, currently between 4% and 6%.
Some providers offer extra "bonus" interest when additional money is paid into deposit accounts.
Details of cash Child Trust Funds can be found on the Moneyfacts website (see link on right).
Secondly, there are "stakeholder" accounts, which invest in a pool or fund made up of a variety of company shares.
As a share-based investment, this is more risky than a cash account, because returns are not guaranteed.
However, stakeholder Child Trust Funds should be "lifestyled". This means the account should be invested in less risky investments, such as bonds and cash, once the child reaches 13.
This is designed to protect the investment from any sudden downturns in the stock market as the fund nears maturity.
The main feature of a stakeholder account, however, is its low annual management charges. Legally, these must be no more than 1.5% a year - the equivalent of £1.50 on every £100 invested.
Once the account has been set up, the provider must also be prepared to accept minimum top-ups of £10 a time.
Thirdly, there is a "shares" option. As the name suggests, it is also a share-based investment.
Unlike stakeholder Child Trust Funds, its charges are not capped.
These accounts are generally aimed at more experienced investors who are looking for a wide investment choice or people who are prepared to take more risk.
For example, a "self-select" Child Trust Fund may allow parents to invest in individual shares, but also in international equities.
Which type of account is likely to provide the biggest profit over 18 years?
Past performance is no guide to the future. Performance of a fund will depend on a wide variety of factors, many of which cannot be easily predicted.
Stocks and shares traditionally outperform cash deposits over the longer term.
However, evidence so far suggests many parents are shunning the stock market and investing their vouchers into deposit accounts.
Julian Crooks, a financial planner at the Financial Planning Service, says novice investors should perhaps stick with cash deposit or stakeholder accounts.
"The best option for the less-sophisticated investor is to go for a basic cash-based account or a stakeholder account, such as an index tracker with lifestyling," said Mr Crooks.
"The self-select funds are really for more experienced investors, who have probably got an existing investment portfolio and they are conversant with more risks."
Can the money be swapped into a different account?
Before parents panic, they should remember that they can change their minds.
Child Trust Fund providers cannot charge for transferring an account.
But if the fund is a stakeholder account or one that invests in shares, the provider may deduct costs - stamp duty and dealing charges - in selling any stocks and shares that form part or all of the account.
The government advises investors to check with the provider about charges before they sign up and before they transfer an account.
How would other relations access the account to add money?
Family and friends can contribute up to £1,200 a year to a Child Trust Fund.
They will need to get the account details from the parents in order to do so.
If a child has a stakeholder account, family and friends can pay into it by cash, cheque, standing order and direct debit.
For non-stakeholder accounts, it's up to the financial providers who manage the account to choose how they accept payments.
The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.
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