COMMENT
92% Of Parents Are Wrong!

Recently, the Inland Revenue sent my daughter a gift of £268.

It came in the form of a Child Trust Fund (CTF) voucher, which I have to save or invest for her until she becomes an adult. You can learn more about CTFs at the official Child Trust Fund website.

So, parents of children born after 31 August 2002 need to decide what to do with their voucher, which could be worth between £250 and £277. For low-income families (those earning less than £13,910 in the 2005/06 tax year), these payments are doubled.

Parents, family and friends can contribute up to £1,200 a year on top of the CTF voucher, and the whole lot will grow free of income tax and capital gains tax. Thus, the CTF is a tax-free savings vehicle: an ISA for kids, if you like!

From Wednesday, 6 April, parents have to decide where to put this CTF cash. The list of CTF providers is growing by the day – currently, there are around ninety providers and distributors. There are three kinds of CTF, all of which provide tax-free returns:

1. A savings account, which pays tax-free interest - Best Buy accounts pay between 5% and 6% a year. 
2. A stakeholder account, which invests in a fund that buys shares in a range of companies. When your child is thirteen, this money is gradually moved into lower-risk investments until it's all in cash at eighteen, in order to avoid a stock-market crash in the last five years of the account. The account must have charges of no more than 1.5% a year, and the minimum additional contribution is £10.
3. A shares account, through which you can buy shares in individual companies.

Last month, I read a press release which warned that 92% of parents (about eleven out of twelve mums and dads) plan to invest CTF money in cash. Aaaaargh – that's the last thing that I'd do! Let me quote from the official 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."

This is the government all but ordering you to invest in shares! Also, using the CSFB Equity-Gilt Study, another source of investment data going back to the nineteenth century, I discovered that shares have beaten cash in all but six of the 116 twenty-year periods since 1869. That's a 95% success rate for shares over the last 135 years, which is good enough for me!

However, I don't fancy opening a stakeholder CTF account, as the 1.5% annual management charge is a bit high for my liking. For example, I can invest £100 a month into a low-cost index tracker or exchange traded fund in an ISA and pay annual charges of as little as 0.3% a year. Hence, I'm not keen on stakeholder CTFs. However, if you twisted my arm, I'd reluctantly point you in the direction of The Children's Mutual, Foreign & Colonial or HSBC.

Therefore, I've decided to open a "self-select shares CTF" with Comdirect for little Miss D, and deposit her CTF voucher plus an extra £1,200 a year into it. I'll use this money to buy value shares and exchange traded funds, with the aim of matching or outperforming the performance of the stock.

Let's compare investing in cash versus shares, with cash growing at 5% a year and shares returning 9% a year. Over, say, sixteen years, my daughter's initial £268 plus my additional £100 a month would produce a lump sum of £29,737. That's a gain of £10,269 on the £19,268 invested. On the other hand, shares would produce a pot worth £42,573. That's almost £13,000 more than cash, and the gain of £23,105 is more than twice as much as the return from cash. Hence, I believe that the superior returns offered by shares are worth taking the extra risk, especially over the long term.

Finally, note that the entire CTF fund is given to your child on his/her eighteenth birthday, so make sure that his/her financial education is up to scratch before this windfall arrives!

More: Visit our Saving for Children centre | Ten Ways To Boost Your Family Finances!