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Anyone with a child born after 31 August 2002 must surely have heard of Child Trust Funds (CTFs) by now. CTFs were created by the government to give youngsters a financial helping hand when they reach adulthood. In essence, they are a tax-free shelter for children, which the government kicks off with an initial investment of £250 (£500 for children of low-income parents). The government adds a further £250/£500 at age seven, and the child gets his/her eager hands on this pot on turning eighteen. Alas, £250 in savings isn't going to grow into a massive sum, even over eighteen years (eleven years for the second instalment). However, the real attraction of CTFs is that parents, grandparents, godparents, other family and friends can contribute a total of £1,200 a year to a CTF on a child's behalf. Of course, being a tax shelter, all income and gains made inside a CTF are tax free, so HM Revenue & Customs keeps its hands off these profits. (By the way, if you don't have children, then why not open a tax-free shelter for adults, known as an Individual Savings Account, or ISA? You'll find some great ISA offers here.) Now for the bad news: most parents choose to stash their child's CTF voucher in cash. Alas, even Best Buy cash CTFs pay interest of not much more than 5% a year, which isn't going to make a child rich. In fact, if I had my way, I'd probably ban cash CTFs, because cash is not the right place to leave your money for eighteen years. On the other hand, seeing the superior returns from investing in shares would give some of tomorrow's teenagers an interest in the stock market which would benefit them throughout their lives. Although there are no guarantees that shares will beat cash, history demonstrates that this is almost always the case over an eighteen-year period. Indeed, here's a quote which I found on the government's own CTF website, which has since been removed: "...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." Hence, I made the decision to invest my daughter's CTF vouchers into share-based investments, and to add £1,200 a year of my money on top. This left me with two choices: As a committed investor, I rejected the cash and stakeholder options in favour of becoming my daughter's personal fund manager. I opened an account for her with popular online stockbroker Squaregain, which only charges commission of £12.50 per bargain (either buying or selling shares). To minimise dealing charges, I will deposit a lump sum of £1,200 each year, buying a single share (or cheap fund) with each annual payment. Happily, Miss D's CTF has got off to a good start, as her initial investment (in a boring-yet-beautiful small insurer) is up almost 30% since September 2005, plus she's in line for a chunky dividend (the income paid by shares). However, this is an exceptionally fine return, and I'd be happy if she makes, say, 10% a year over the next sixteen years. Investing £1,200 a year for eighteen years at 10% a year would produce a pot worth £57,640, plus the returns from the government's vouchers, as well. However, this won't be worth as much as the same amount in today's money, thanks to the effect of inflation (rising prices). Nevertheless, it should give my daughter a head start in life -- I only hope that she spends her windfall wisely! So, although cash is king for short-term savings, shares win through in the long term, despite the higher risks attached. Here's to superior returns from long-term investing! This article is dedicated to my friend Steve and his newborn son. More: Check out the deals in our Saving for Children centre.
