An Introduction to Child Trust Funds
Since September 2002 every child born in Britain has been issued with a voucher by the government which can be used to open a special type of bank account - a Child Trust Fund (or CTF).
These accounts are intended to provide a head start for children when they reach maturity, helping to finance further or higher education, for instance, or to help in other ways such as providing a mortgage deposit or funds for a first car.
The initial voucher is for £250 in most cases, although families on low income (less than £14,995 at the time of writing) will receive double that. A second voucher of the same value is issued when the child reaches the age of 7, and the government is considering whether a further voucher may be issued when the child enters secondary school.
These vouchers have no actual cash value and can only be redeemed by opening a CTF, and should the parent fail to open an account within 12 months of the birth, the voucher will expire and the government will open a Stakeholder Account (see below) in the child's name.
Varieties of Child Trust Fund Account
There are three basic types of CTF account:
Stakeholder Accounts
These are the 'standard' type of account and the most widely available. Funds in the account are invested in a portfolio of shares, and will therefore rise and fall with stock market performance. Historically, this has provided the best returns for long term investments.
Under stakeholder accounts, the funds are slowly transferred into very low risk investments when the account is 13 years old, to protect any gains made and ensure that the final payout isn't risked unduly.
Shares Accounts
These are similar to stakeholder accounts, but there is no transferal of funds into low risk stocks - this is more risky, but may well provide a better return overall.
Savings Accounts
These accounts have no element of stocks and shares, and instead operate much like any other savings account and pay interest on the deposits. These accounts are very safe, but are unlikely to see your child's money grow to as large an extent as the other two account types.
Account Operation
All three types of account allow further deposits of up to £1,200 a year, and the money is locked into the account until it matures when the child reaches the age of 18. No withdrawals are allowed under any other circumstances.
These optional extra deposits can be made by anyone, such as parents or grandparents, but any unused portion of the £1,200 allowance can't be rolled forward into the next year.
There is no tax paid on either the deposits or any investment return or interest earned.
When the account matures, the money will be paid directly in a lump sum to an account nominated by the account-holder, and there are no restrictions upon how it can be spent.
CTF Account Providers
There are many banks and building societies offering CTFs, and you'll be given the current list of providers when you receive your voucher and information pack. Some accounts available have distinguishing features such as having an ethical investment policy, whereby the funds won't be invested in tobacco firms, arms manufacturers, high pollution industries and the like.
Is a Child Trust Fund Worthwhile?
If the only deposits to the account are the government issued vouchers, then the final payout is likely to be rather small. It is still, however, 'free money' and so it's worth the small amount of time it takes to set up an account.
Where CTFs really come into their own though is when extra funds are added, even if not up to the maximum amount allowed. By contributing even a small amount regularly, you'll be helping to give your young child a great start into adult life when the time comes.
