Child Trust Funds

The Child Trust Fund (CTF) is a long-term investment and savings account for children that was introduced by the government to help children understand personal finance and get into the saving habit, teach children about the benefits of saving and ensure they have savings at the age of 18.

Neither the child nor the parents will pay tax on income and gains in the account, and the government provides a voucher worth £250 to start each child’s account. The government makes a further contribution of £250 when the child turns seven years old, and children in lower income families will receive extra payments.

Up to £1,200 can be saved annually in the account by friends or family, but parents cannot take money out of the CTF once it has been put in. Children can start to make decisions about how the money is managed when they turn 16 and at 18 they will be able to decide how to use the money.

Risky Choice

There are three different types of CTF account – savings, shares and stakeholder accounts - and the one parents choose will depend on how much of a risk they are willing to take in order to give the money a better chance to grow.

With a CTF savings account, any money invested is secure and will earn interest, but the sum might not grow as much as it could if invested in shares. Savings accounts tend not to perform as well as money invested in shares over the long term, and when inflation is taken into consideration, money in the account could lose value over the long term. As with all accounts, the provider will charge for the cost of running it, so check the fees before opening an account.

Shares accounts invest the child’s money in companies and when these companies do well, so does the CTF account. History shows this type of account has the potential to do well in the long-term, as the stock market’s value will typically rise more than it falls over time. Investing in shares is more risky, however, as shares can lose value if companies do not perform well.

No Guarantee

For every 18-year period in the last 40 years, shares have outperformed savings accounts, but that is no guarantee that shares will continue to be the best long-term investment and parents must be aware that shares can go down in value as well as up. The charge on shares accounts is usually a percentage of its value, so check how much this is with the chosen provider.

CTF stakeholder accounts invest in shares, but the government has made certain rules to reduce the risk of the investment. The child’s money is not invested in just one company, but is spread over a number of companies to reduce the risk, and once the child is 13, money in the account starts to be moved to safer investments or assets.

This protects funds from stock market losses as the account holder’s 18th birthday approaches. Uniquely, the charge on the CTF stakeholder account is limited to no more than 1.5 per cent a year, and the stakeholder account is the one HM Revenue and Customs will open on the child’s behalf if parents do not use the voucher before it expires.