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Childrens Trust Funds

Children's Trust Funds were established by the Government to give all children born after 1st September 2002 and in receipt of child benefit a lump sum of £250. This came in the form of a voucher to be invested by the child's parents into a suitable Children's Trust Fund arrangement in the child's name. When the child reaches age seven, the Government will pay an additional £250 directly into the account.

Children in low income families will receive £500 on each occasion. The reasoning behind Children's Trust Funds is to get children into the habit of saving and provide them with a financial head start when they reach age 18, at which time they can encash the plan and spend the capital as they wish. The proceeds of the plan are completely free of tax and all income and capital gains within the plan are also tax free.

Child Trust Fund Providers:
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Children's Trust Funds can take two forms:

cash deposit account, where interest is added to the account tax free
a "stocks and shares" type account, for parents wishing to take a longer term view, based on unit trusts and investment trusts which, although offer the potential for increased investment returns do, by their very nature, carry a higher level of investment risk.

However, the Government have introduced "stakeholder" Children's Trust Funds which are invested in stocks and shares but which have to follow certain Government guidelines in order to reduce investment risk.

It is possible for parents, family and friends to also invest further amounts into a Children's Trust Fund up to £1,200 in each plan year.

ISAs can offer some excellent advantages providing a child with a tax free cash sum when they reach age 18.

Of course, there are certain restrictions that may limit the attractiveness of making additional contributions, with the major drawback being that the child is absolutely entitled to the cash when they reach 18 and is able to spend this on whatever they want - clothes, holidays, gadgets - not necessarily the things that parents perhaps had in mind - university, wedding, deposit for a house.

Look at the various types of Child Trust Funds on offer to ensure that you choose the most suitable one for your child.