Child Trust Funds / CTFs
Child Trust Funds, or CTFs, are tax-free savings accounts, specifically designed for children. They were introduced on the 6 April 2005, and aim to help parents prepare their children financially for the transition into adulthood. Parents and friends can make contributions to the account, and any child born after 1 September 2002 qualifies to receive contributions from the government. Currently the government makes two contributions of two hundred and fifty pounds to the CTF, paid when the account is opened and around the child's seventh birthday. Low-income families may qualify for two contributions of five hundred pounds instead. When the child in question reaches eighteen, they can choose to withdraw the money in the fund or re-invest it. Noone but the child to whom the trust fund belongs is able to access the money.
As with other savings accounts there are different types of Child Trust Fund available, each with different levels of risk, terms and conditions. Although limited amounts of capital can be invested, the balance of the account and any returns are not subject to tax deductions. Usually these accounts offer very generous interest rates; many guarantee an interest rate one percent higher than the base rate. A total of one thousand two hundred pounds can be invested in the Child Trust Fund each year: the year is calculated as beginning on the child's birthday and ending on the day before their next birthday. There is not usually a minimum amount that should be invested. A parent or guardian will be responsible for managing the account on behalf of the child, until the child's sixteenth birthday. After the age of sixteen, the child is allowed to manage their own account, but they will not be able to make withdrawals until their eighteenth birthday. If a child becomes terminally ill, it is possible to access the funds before their eighteenth birthday. CTFs can be transferred to new providers if accounts with more favourable terms are offered; it is also possible to change the type of CTF account. There are three types of CTF available: a cash CTF, a stocks and shares CTF and a stakeholder CTF.
Cash CTF
A cash CTF is the most basic type of Child Trust Fund, working in much the same way as a regular savings account. There is no risk to the capital invested, you are guaranteed a generous interest rate and any returns are tax-free. However, over the long investment period it is likely that the buying power of the fund will reduce: one hundred pounds will almost certainly buy you less in eighteen years than it does now. Cash CTFs offer no protection against inflation. You may be charged an administration fee by your account provider for managing the fund. If you would prefer the money invested to have a chance of beating inflation and earning potentially larger returns but avoid unneccessary risk, you may find a stakeholder CTF a good compromise.
Stocks and shares CTF
Stocks and shares CTFs invest money saved in the fund in the stock market. They use the fund to purchase company shares: when the value of these shares increases, so does the value of the fund. However, if the shares in which the fund is invested do badly, the value of the fund will decrease: for this reason the share CTF is seen as a risky option. In fact, considering the eighteen year investment period, it is likely that a share CTF will produce reasonable returns. Although share prices will fall at times, they will also increase at others; on average, shares will increase in value after eighteen years, just as prices will increase steadily over this period. As a result, a share CTF is not really a high risk option, but it is important to remember that past performance of shares cannot be taken as a guarantee of their future performance. There is no guarantee that you will not lose some of the invested capital, but any returns you do make are tax-free. Some CTF providers will allow you to choose the companies in which you wish to invest, enabling stocks and shares CTFs to be adapted to suit ethical or religious preferences. You will usually be charged an administration fee by your account provider for managing the fund.
Stakeholder CTF
A stakeholder CTF also invests the fund in company shares. Just as with share CTFs, if the shares increase in value over time then the value of the fund will increase, and if the shares fall in value the value of the fund will decrease. There is no guarantee that the value of the fund will increase, and you could end up losing money. However, stakeholder CTFs operate according to strict government guidelines. The way in which the fund is invested is monitored to ensure that no unreasonable risks are taken. At the beginning of the investment period, the fund might be invested in riskier shares to maximise potential returns, but as the child approaches their eighteenth birthday the fund is invested more securely, for example in a regular savings account. There is also a limit on the amount that the account provider can charge for administration of the fund, currently set at 1.5% of the fund total. Independent experts supervise the management of stakeholder CTFs and ensure that the account providers are abiding by the necessary rules. If you receive the initial two hundred and fifty pound voucher from the government and do not open a CTF account, the money will automatically be used to open a stakeholder CTF in the child's name once the voucher has expired.
