COMMENT
My One-Year-Old Investor!

By Cliff D'Arcy
September 16, 2005

Although my daughter has yet to reach her second birthday, she already owns a stake in a £158 million company!

As she was born after 31 August 2002, HM Revenue & Customs (HMRC) gave her a voucher worth £268 towards her Child Trust Fund (CTF). The basic award is £250, but she got a little more for having to wait for her award. (Note that children of low-income parents receive up a voucher worth up to £500.)

On its own, a CTF voucher wouldn't amount to much at age eighteen, but the fund acts as a tax-free shelter (a bit like an ISA for kids). Parents, other relatives and friends can deposit up to £1,200 a year into a CTF, building a nest egg to help fund the cost of, say, tertiary education, driving lessons and a car, a house deposit or gap year. HMRC will also make a yet-to-be-decided further payment into the account when a child turns seven, perhaps another £250 (£500 for low-income families).

Although HMRC had issued 1.7 million CTF vouchers by last month, so far, only half a million (less than a third) have been invested! Perhaps parents are suspicious and believe that there's a catch, but a CTF voucher really is something for nothing. It's a genuine free gift, and a completely tax-free incentive for parents to save for their kids. If parents don't deposit their child's CTF voucher within a year of its issue, HMRC will open a Stakeholder CTF on the child's behalf.

The majority of parents who have already opened a CTF have made one of two big mistakes. The first is to pop along to their bank and open an account, because the CTFs sold by the big high-street players are nothing special. The second howler is to open a cash account, instead of a stock market-based Stakeholder or shares CTF.

According to one survey, about half of all CTF vouchers have been deposited in cash accounts; a third have gone into Stakeholder accounts; and just a sixth into shares CTFs. For the record, some small building societies pay upwards of 5% to 6% a year on cash accounts, but read this quote from the government's own CTF website,

"...in the past, an amount of money left for a long time in [a shares-based] account has grown more than the same amount left in a savings account. This is true for every eighteen-year period in the last forty years."

So, based on past performance, I'd expect a shares-based account to beat a cash CTF over the next eighteen years. However, if you can't afford to make additional contributions to your child's CTF, then there won't be that much difference between a cash account on one hand and a Stakeholder or shares CTF on the other, so don't worry too much.

Being a fan of the stock market, I decided to put Miss D's CTF voucher - plus a lump sum of £1,200 - into shares. In order to keep costs to a minimum (because every fee eats into her returns), I chose a self-select shares CTF with leading online broker Squaregain (formerly Comdirect). Squaregain charges a flat dealing fee of £12.50 for buying or selling shares, with no annual fee or other charges.

Thanks to me, HRMC and Squaregain, my daughter is now the proud owner of a few thousand shares in a small insurance business, although she doesn't know it yet! After buying commission of £12.50, stamp duty of £7.28 (0.5% of the value) and a small slip in the price of these shares, my daughter's CTF is currently showing a loss of about 5%.

However, I have high hopes for its future performance, especially as I intend to invest a further £1,200 on each anniversary of her CTF. I just hope that she doesn't splurge all of her nest egg on her eighteenth birthday party!

You can open a CTF account with Squaregain in our Online Brokers centre.

More: Visit our Saving for Children centre | 92% Of Parents Are Wrong!