A Child Trust Fund, or CTF, is a savings account that has been designed for parents of young children. The account belongs to the child and any money saved can only be withdrawn by the child once they turn 18. In a bid to help start the savings account, the government awards any child born on or after 1 September 2002 with a £250 voucher. A further £250 voucher is awarded on the child’s 7th birthday, and it is currently being discussed whether another payment should also be made when your child is in secondary school.
Types of CTF
There are three basic types of CTF – a pure savings account, a stakeholder and a non-stakeholder account.
- A savings account is the most secure of the three accounts and is similar to investing the money in a high interest savings account with a bank or building society. While the money is secure in a savings account it does not have the potential to grow as much as it would by investing in shares.
- A stakeholder account is a heavily governed investment account. It does rely on investment in shares but the government has introduced various rules that stakeholder fund managers must follow. These rules aim to ensure that the money invested is safe over the entire period of the investment. Primarily, the money is usually invested in medium risk, medium gain shares, and once your child turns 13 the money is then moved into lower risk investments such as cash.
- Non-stakeholder accounts are pure share investment accounts. There are fewer regulations that the trust fund manager must follow and there is greater potential for more gain. However, there is also more risk associated with these accounts when compared to stakeholder accounts and certainly when compared to savings accounts.
Choosing the Right Account
The type of account you choose will depend largely on the level of risk you wish to take. Traditionally, share portfolios perform well over longer periods of time. A poor year can be quickly compensated by one or more good years following it. Because a CTF will be active for 18 years or more, depending on your child’s decision, there is actually very little risk involved in investing in shares.
Parents and family have the opportunity to invest extra money up to the value of £1,200 per year, into the Child Trust Fund. This is an excellent way of ensuring that, when the child does turn 18, they have a greater sum of money to withdraw. All of this investment is tax free, and the money your child withdraws at the age of 18 is also tax exempt.
Increasing the CTF Value
Without investing any extra money your child’s Trust Fund may be worth approximately £500 in 18 years’ time. By investing just £10 a month, this increases significantly to a windfall of nearly £5,000 presuming a 7% growth. If you can afford more than this then a £50 monthly investment will see the trust fund rise in value to as much as £20,000 over the same period and with the same growth. It really does make sense to invest extra if possible.
The Child Trust Fund, or CTF, is an excellent opportunity for parents to invest in their child’s future. With the rise in housing prices it may provide a very beneficial way of paying the deposit on a first house. Alternatively, your child may decide to keep the money invested once they turn 18.