It’s not often you get free money from the government – but choosing a child trust fund can be a challenge
The idea behind child trust funds is that they help parents to save for their children and teach children about managing money. The government will give you a voucher worth £250 (or £500 if you receive the maximum amount of child tax credits) to give your child’s trust fund a kick start and all children born on or after September 1st 2002 qualify for this free money.
• All the money that’s in a child trust fund is free of tax
• You, your family and friends can pay up to £1,200 into a child trust fund each year between you
• The money belongs to your child and after they reach 16 they can have a say in where it’s invested
• Money in a child trust fund cannot be taken out until your child’s 18th birthday, but it can be transferred to a different provider
• There are no restrictions on the child trust fund on what your child spends the money on.
Age 7 payment
Children receive a second payment of £250 (or £500 if you’re on a low income) when they reach their seventh birthday (called an ‘age 7 payment’).
• The money is automatically paid into your child's trust fund account within two weeks of their birthday, so you don’t need to claim it.
• HM Revenue & Customs will write and tell you once the money has been paid in. If, for any reason, you don’t receive yours, contact your child trust fund provider.
SAVVY TIP: If you paid in the maximum each year (£1,200) your child could have around £30,000 in their fund when they reach 18 (assuming a 3% return). Find out how much your child trust fund could produce by using the government’s child trust fund calculator, just part of the information that’s available on the government’s dedicated child trust fund website.
Opening a child trust fund account
The actual process of opening the account is relatively easy, as long as you know the account you want (and that's the tricky bit!). All you have to do is either send in the child trust fund voucher or quote the voucher number that appears on the top right hand corner (also called the URN) if you’re opening the account by phone or online.
SAVVY TIP: Many providers offer vouchers and discounts to encourage you to sign up to their child trust fund. They’re definitely worth comparing the offers if you’re trying to decide between two similar child trust funds - but don’t sacrifice a better interest rate for a short-term freebie. The Children's Mutual has a website called CTFcashback, where you can get cashback for shopping and money you earn is paid straight into your child's child trust fund.
Where to get information
The government’s child trust fund site is full of information but there's a bit too much of it and it can't give advice (which is what most parents really want). There’s a site called mynestegg.com, which has been set up by a firm of independent financial advisers. It has information about child trust funds and compares both freebies and performance of different CTFs (however I've just been on the site and performance figures for stakeholder and shares-based CTFs haven't been updated since July 08. Unless they're updated regularly, they're no use at all).
SAVVY TIP I commissioned some research from the financial information website Moneyfacts looking at how cash child trust funds have performed and contacted the most popular providers of stakeholder child trust funds directly. You can find out how they performed by reading my article on how child trust funds have performed.
Types of child trust fund
There are three child trust fund options:
• Cash child trust fund: A straightforward savings account. Some cash child trust funds include a bonus on top of the interest rate to encourage you to keep your fund with them.
SAVVY TIP: If you’re not sure what type of child trust fund to open, you can always take out a cash child trust fund while you work out what to do. You can switch to another type of child trust fund (and there will be no penalties for doing so) once you’ve decided what to do.
• Stakeholder child trust fund: A fund that invests in shares, but which moves money to lower-risk investments from your child’s 13th birthday onwards. The fund cannot charge more than 1.5% a year and has to accept contributions of £10. All providers have to offer a stakeholder account.
SAVVY TIP: If you haven’t invested your £250 voucher a year after you’ve received it, the government will invest it in a stakeholder child trust fund for you.
• Shares child trust fund: This invests in a variety of shares in different companies. The shares may be in companies in the UK or further afield. Unlike stakeholder accounts, there is no 1.5% limit on annual charges and money does not have to be moved to less risky investments, although some child trust fund providers may choose to do this.
SAVVY HELP: Karen Ritchie, an independent financial adviser with Financial Planning for Women, is one of SavvyWoman's panel of experts. Why not ask Karen a question about child trust funds by clicking here?
