FOOL'S EYE VIEW
Child Trust Fund Details Revealed

By Jane Mack (TMFJane)
February 3, 2004

Last night, I was watching the telly and saw Kerry McFadden crying in the Australian jungle. Yet again. She's been tearful quite a lot recently and, on this occasion, it was because she was missing her daughter's birthday.

If you haven't a clue who Kerry McFadden is, then join the club. Ten days ago, I didn't know either. Apparently, she used to be a member of the girl band, Atomic Kitten, and is now married to a member of the boy band, Westlife. She's also taking part in the latest series of I'm a Celebrity - Get Me Out of Here!

Which is why several million viewers, including me, have been watching her frequent bouts of weeping in the Australian jungle over the last week or so. This time it was her daughter's first birthday that set her off and, not surprisingly, she was rather upset that she was stuck in the middle of nowhere instead of helping little Lily to unwrap her presents back home.

Well, Kerry, it's small consolation, I know, but you might be pleased to hear that, as your daughter was born after 31st August 2002 (and assuming she's living in the UK), she qualifies for the government's fabulous new Child Trust Fund.

In case you haven't heard of the Child Trust Fund (CTF), it's a new savings and investments vehicle in which money can be held for your daughter - tax-free - until she is 18 years old. Not only can you, and anyone else for that matter, contribute up to £1,200 a year - I repeat, with no tax repercussions whatsoever on any profits - but the government will occasionally bung in a few quid too.

Unfortunately, even though initial plans for the CTF were announced way back in 2001, the government has only just got around to publishing the finer points of how it will work when it finally gets off the ground in April 2005. (I know, I know, your daughter will be potty-trained by then and you'll be jolly annoyed that, because you've been forced to delay making contributions to Lily's fund, she'll have missed out on the potential profits you might have made for her since her birth).

Oh, well.

Anyway, Kerry, as the government has finally published the details of how they want the CTF to work, let's mull over the following points and see what you think:

• All children born on or after 1 September 2002 will be eligible for the Child Trust Fund account.

• The person 'responsible' for the child (usually the parent who is claiming Child Benefit) will get a special voucher from the Inland Revenue to the value of £250, which they will have to use to open a CTF within 12 months of issue. (If the child comes from a low-income family, the voucher will be worth £500).

• If the person responsible for the child fails to use the voucher to open the CTF account within 12 months of issue, the Inland Revenue will do it for the child automatically.

• On top of the government's initial contribution, anyone can contribute at any time to the child's personal CTF as long as total contributions do not exceed £1,200 a year. As a bonus, the government will add a further, as yet, unspecified amount when the child reaches the age of 7.

• Any money put into the fund must either go into a stakeholder account or a non-stakeholder account.             

• The proposals describe a stakeholder account as one that essentially invests in the stock market (it'll work much the same as an equity ISA) except that the investments must mirror those of a 'reasonably cautious' investor and the investments must be 'adequately diversified'.

• Since the child will gain access to the money upon reaching the age of 18, the person overseeing a stakeholder account must begin to move the money out of the stock market and into 'safer' investments on or before the child's 13th birthday. (Unless the 18 year old 'child' agrees to continue investing the fund beyond his or her 18th birthday at which point the fund will stop benefiting from its tax-free status).

• The above two points apply to a stakeholder account. Unfortunately, there isn't a detailed description of a non-stakeholder account in the government's draft regulations or the accompanying notes but the Treasury tells me that it could range from a very safe bog-standard savings account to a high risk equity-based investment. In the latter instance, providers will apparently be required to tell you that what you're doing with your child's money is high risk. 

As I have already mentioned, a stakeholder account will work pretty much the same as an equity ISA but the key difference is that companies offering CTFs will be able to charge annual fees of up to 1.5%. This is quite a bit more than the 1% they can charge for investments into CAT-marked ISAs or Stakeholder Pensions. The industry has been shouting long and hard about how little they're allowed to charge for such things so it looks like the government has buckled under the pressure and is planning to let them charge up to 50% more for CTFs.

CTF providers will also be able to charge a bit extra if you want frequent information about how your daughter's fund is performing. And, if you want to buy (and sell) shares within your daughter's CTF account, the 0.5% stamp duty costs aren't included in that 1.5% annual charge. (These charges could cost your daughter a great deal over the long term if you're not careful, so make sure you look at companies charging the least for their overall service when you come to invest).

Oh, and finally, seeing as the government has taken rather a long time to get its act together, it has decided that its initial contribution of £250 will be boosted by a bit extra for the eligible children born before the scheme is finally implemented in April 2005. The extra is supposed to account for any lost investment returns in the interim. In your case, Kerry, Lily will get £268 instead of £250 as she was born after 6th April 2003.

Considering the stock market has risen by rather more than that recently - around 25% since her birth - I reckon you should be feeling very peeved that the scheme still isn't in place and that you've got to wait at least another year before you can get on with the job of investing in your daughter's CTF.

Have you started crying again yet?

Find out more about the Child Trust Fund.