Child Trust Funds enable every child born since September 2002 to build up a savings stash for when they turn 18.
How Child Trust Funds work
Child Trust Funds are available to every child born on or after 1 September 2002 who lives in the UK and for whom Child Benefit is received. Essentially, they are like an ISA for children, a tax-free vehicle which you can use either for savings or investments.
CTF vouchers for £250 are automatically sent to the Child Benefit claimant for each newborn child, usually the parent, and these can be used to open a CTF account.
Greater benefits for low-income families
Poorer families, who have claimed Child Tax Credit and whose household income is low get a further £250 from the government, making £500 in total. The government has stated that it intends to make a further similar contribution to the CTF when the child reaches the age of seven.
Growing your Child Trust Fund
Once the Child Trust Fund is opened, parents, family and friends, and the children themselves when older, can make additional contributions of up to £1,200 a year between them and children are not taxed on any income and gains they make on the investments in their CTF account but no money can be drawn out until the child's 18th birthday. From that day on the money will belong to them, so they'll be able to do whatever they want with it.
Three types of Child Trust Fund
It's up to the parent(s) to choose what sort of CTF account to open. There are three basic types:
- A savings account, which simply pays tax-free interest.
- 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.
- A shares account, through which you can buy shares in individual companies. At the time of writing, there were dozens of companies offering one or more of these types of CTF account. Bear in mind that you can change CTF accounts whenever you like, although in the case of stakeholder and shares accounts there may be costs for doing so.
Many parents opt for the savings option and it's easy to see why. You know what rate you're getting but the fund will grow at a low and slow pace over the 18 year period. As ever one of the stock market options is much more likely to result in better returns.
Parents who feel comfortable with the concept of investing are more likely to favour the shares option rather than the stakeholder one. But those who don't know much about investing in the stock should probably opt for the stakeholder which is essentially an index tracker.
Finally, note that if you don't open your child's CTF account within twelve months of receiving the voucher, Revenue & Customs will automatically open a stakeholder account for your child. You'll be free to move it to another provider afterwards if you want though.
View our Saving For Kids brochures.
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