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It’s a rare day indeed when the government decides that rather than take money off us, it will actually be handing some of it back instead. But that’s just what it is doing with its Child Trust Fund, or CTF, a set of vouchers worth at least £500 for every child born after September 2002. So where should you put your money?
CTF basics
The money comes in two £250 slices: one at or shortly after a child’s birth, the other at age seven. Children whose parents are on benefits may receive a further £250. The money is held in the child’s name until the age of 18.
But until then, as the parent you have a major say in how it is invested, certainly until your kid is a teenager. Given that a further £1200 a year can be invested by you, your family and friends, it could in theory amount to a pretty large lump sum if you get your investment decisions right – or a pitiful amount if you get them wrong.
So where should you be looking to stash your child’s cash? You basically have a choice between cash-based deposit accounts and share-based ones, both of which are fairly self-evident, plus stakeholder funds, investing in a variety of stocks and shares, as well as bonds. They generally spread the risk between different assets. In other words some risk but not too much – and performance-wise, most funds will bunch up together over the next 18 years.
Choosing a CTF
Cash is not king. You may be tempted to stick your kid’s money in a safe bank or building society cash-based CTF. Bear in mind that if you do, it is almost certain to grow at a far lower rate than if it were invested in shares.
Taking a risk should pay off. You have 18 years before that money will be accessed. In that time, short-term stock market volatility stands a pretty good chance of evening itself out.
A survey from data provider Moneyfacts in September 2007 found that the value of a shares-based child trust fund had, on average, risen by one-third since April 2005, compared with a 15 per cent rise in deposit-based funds. But the figures also revealed a wide disparity in returns.
The best-performing child trust fund, run by Norwich Union, was up 50 per cent while the worst, operated by Scottish Widows, was ahead 19 per cent. Still, even this bottom performing shares based fund beat the best cash-only fund.
Don’t make short-term comparisons. The stock market fall in the second half of 2007 will almost certainly affect performance statistics.
Who can help?
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The Government’s own CTF website has a very useful tool to help you decide on where to put your money, as well as having a list of all providers.
If you need advice on what fund to choose, you may want to talk to an independent financial adviser (IFA). This is particularly important if you intend to top up your child’s CTF with some of your own money, or cash from family and friends. To find an IFA near you, go to unbiased.co.uk
MyNestEgg is a free website that helps you save for your children. It includes some interesting reviews of CTFs by their investors.
Author
Nic Cicutti is a journalist and broadcaster. An award-winning former personal finance editor at The Independent and editor of the Financial Times’ website FTyourmoney, he tries to practice what he preaches but doesn’t always succeed.
Your experience
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