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All Child Trust Funds are not equal, so pick yours carefully

WITH Child Trust Funds (CTF) turning five this month, families are being urged to view this anniversary as an opportunity to review the scheme they have in place. Launched in April 2005, CTFs were opened for all children born after 1 September 2002 with a £250 lump sum, rising to £500 for children from the poorest families.

Each child then receives another £250 instalment to their nest egg when they reach seven, with low-income families getting £500; from this month, an extra £100 or £200 is also being paid into the funds of disabled children, depending on the level of disability.

Five years on from the first vouchers being issued, more than 5m children now hold a CTF, according to HMRC. However, many parents are unaware that they can move their child’s account to a different provider at any time. Providers normally send out an annual statement which can be used to monitor how well the chosen fund is doing, and if you’re not happy with its performance, you should consider moving elsewhere.

There is also nothing to stop you switching to a different type of account, as there are three main options to choose from: a stakeholder or non-stakeholder fund, both of which are shares-based, or a deposit account, which is cash-based.

The account you choose depends on how you feel about taking a risk in order to give the money a better chance to grow. Stakeholder funds invest in equities before switching to less risky investments, such as bonds and cash, as the child reaches their teens. This is done through what is known as a “lifestyling” element. Maximum annual fees are capped at 1.5 per cent. Non-stakeholder funds carry higher charges, but aim to generate more growth through riskier stock market investments, while deposit accounts are run by banks and building societies and are very similar to ordinary savings accounts.

Despite recent stock market turbulence equity-based saving schemes have historically outperformed cash savings over the long term. “There are cash options, but I believe it is madness to invest your CTF in cash,” says Darius McDermott, managing director of Chelsea Financial Services. “You’ve got 18 years to invest, and if you look at any 18-year period over history, shares have beaten cash.”

SIMPLE AND FLEXIBLE
He prefers the non-stakeholder to the stakeholder option. “We feel exposure to the market via a stakeholder CTF is too constricted by government requirements, making the mandates very inflexible for fund managers,” says McDermott.

He adds: “Bearing in mind investment choices and charges – as well as minimum investment amounts – our favoured provider is The Children’s Mutual as it offers a simple, flexible, easy-to-use service, as well as access to four major fund groups. The fund gives investors access to Invesco Perpetual High Income – one of the most popular unit trust funds over the past 15 years – and one which we recommend.”

He also picks out F&C’s investment trust saving plan for children. “F&C offer a wide range of their strong-performing investment trusts within the CTF wrapper,” he says. “They are also competitive on minimum investment, fund choices and charges, and are well-known and experienced investment trust managers.”
If you feel happier investing in cash, you need to be aware that rates have taken a battering over the last 18 months – along with the rest of the savings market.

“In October 2008, the average rate on a cash-based CTF was 6 per cent with a top deal offering a massive 7.75 per cent,” says Andrew Hagger at price comparison service Moneynet.co.uk. “But the average rate has now slumped to a mere 2.36 per cent.” At present, the best rate is 5 per cent from Hanley Economic building society.

Once you’ve reviewed your fund choice, you can then help boost the value of the fund by adding regular contributions up to a maximum of £1,200 a year tax-free; the money will then grow tax-free until the child’s 18th birthday.

FINANCIALLY RESPONSIBLE
Figure from The Children’s Mutual suggest that 1.4m parents, family and friends are contributing to their children’s accounts – in excess of £22m is being added every month. “If you were to invest in a stocks and shares non-stakeholder CTF and topped up by £100 a month – the maximum allowed – then assuming a return of 7 per cent a year, you would have £34,000 in 18 years’ time,” says McDermott.

While it is up to the child to decide how to spend the money when they turn 18, most parents hope their offspring will be financially responsible enough to use their nest eggs wisely – to pay for university fees, training, or a deposit on a first home. “The aim is to ensure children have some money behind them to start their adult life,” says McDermott.

However, the CTF landscape could be about to change depending on the outcome of the forthcoming election, as the Tories are proposing to scale them back if they win – concentrating only on the poorest third of families. “The likelihood is that tax breaks and financial support from the government will be restricted in future regardless of who is in power,” says Adrian Lowcock, senior investment adviser at Bestinvest. “I recommend parents take advantage while they can.”