What is a Child Trust Fund?
All children born since 1st September 2002 who receive Child Benefit will receive a voucher from the Government worth £250 to invest in a Child Trust Fund. When the child reaches the age of 7, an additional £250 will be paid directly into the account by the Government. For low income families, each payment will be worth £500.
The Child Trust Fund is a long term savings plan designed to give children a financial boost into adult life. When the child reaches the age of 18, they can take the money out and spend it on whatever they want. The initial contribution is made by the Government and family and friends can top-up the account by a further £1,200 in each plan year.
What types of Child Trust Fund can I choose from?
There are two types of Child Trust Funds from which to choose – cash CTFs and stocks and shares CTFs. Although the voucher cannot be split between the different types of CTF or providers, it is possible to switch from one type or one provider to another at any time.
The cash Child Trust Funds are deposit accounts which will pay tax-free interest. The stocks and shares CTFs are based on unit trusts or investment trusts and so will benefit from the reinvestment of dividends and the appreciation in value of the underlying assets. Again, all income and capital gains will be tax free.
When should I open a Child Trust Fund?
Although it is important to compare Child Trust Funds, it is equally important to act quickly as if the voucher has not been invested after twelve months, the Government will invest this for your child in the 'default' fund, taking away the choice from you, although it will be possible to switch at any time thereafter.
Why is it important that I compare Child Trust Funds?
By ensuring you compare Child Trust Funds, you will know that your final choice meets your objectives for your child, given the long term nature of this type of investment.
If you would like to have an investment which is very low risk, then the cash CTF may be more appropriate and so it is important to compare interest rates.
Alternatively, if you are prepared to expose your child’s investment to the stock market and potentially obtain greater investment returns over the longer term, then the stocks and shares CTF may be suitable. In that case, you should compare plan charges, fund risk profile, past performance and pedigree of the Fund Manager to ensure it meets your requirements now and in the future.
What if I'm still not sure what Child Trust Fund to choose?
If you are at all unsure which one is right for you when you compare Child Trust Funds, you should seek the advice of an impartial financial adviser who will be able to guide you in the right direction, both with your choice of CTF and provider.
Get free Child Trust Fund brochures to tell you more about Child Trust Funds and how they work so that you know what you're looking for when you compare Child Trust Funds.
