MONEY COMMENT
Become Wealthy At 18

By Jane Mack (TMFJane)
April 15, 2003

The Chancellor didn't give much away in last week's Budget but one welcome bit of news was the confirmation of the Child Trust Fund for babies.

The details have yet to be hammered out but we know that every baby born after August 31st 2002 will get a gift from the Government of £250, rising to £500 for families who qualify for the full Child Tax Credit.

The Government is to look at the possibility of adding to the fund at key stages during a child's life – perhaps at ages 5, 11 and 18 – but relatives and friends will be able to top it up by a maximum of £1,000 a year until the child reaches 18, at which point they can do as they please with the money.

The fund is supposed to encourage children to save but unless it's topped up by the permitted £1,000 year, it's not going to make your child rich. Even then it'll depend on what restrictions the Government puts on where the money can be invested. It's to consult on whether the investment scope of the fund should be limited to 'safe' products such as the simple savings accounts.

This would be a mistake. Numerous studies have shown that the stock market produces much greater returns than cash, bonds or gilts. For example, Credit Suisse First Boston investment bank came up with the following figures for the period 1869-2002. After accounting for the effects of inflation they are:

• Cash                1.8%
• Gilts                 1.8%
• Equities            6.2%

If the CTF is restricted to mere cash returns, then £250 in 18 years' time is going to be worth a mind-blowing, wait for it, £345. If invested in the stock market via a cheap and simple index tracker, it would amount to around £700. Not a lot more but it's a bit better than the cash return. Of course, the returns from shares can be volatile, as we've seen in recent years!

The real benefits of the CTF will come from family members topping up the fund and investing it in the stock market. If the maximum £1,000 a year is added then a child could be looking at a lump sum in today's money of around £32,000 on reaching maturity.

Now, that's more like it! That should be enough to pay for university or put down a deposit on a house. Maybe they'll be so impressed by the miracles worked by compound returns that they'll continue saving.

The CTF will be available at the latest by 2005 although the detailed proposals are expected this summer. It's not known whether relatives will be allowed to backdate their own payments into the fund but, if so, then start saving now for any children that qualify.

More: Savings Centre | Learn to Invest | Investing for children discussion board