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Child Trust Fund

(Also called Children's Trust Fund, Child's Trust Fund)

Child Trust Fund is a savings and investment account for children which started on 1 April 2005. Children born on or after 1 September 2002 will receive a child trust fund voucher for £250 from the Government to start their account. The Child Trust Fund account belongs to the child and can’t be touched until he or she turns 18, so that children have some money behind them to start their adult life. When the child is seven, he or she will receive another £250 child trust fund voucher. Poorer children, whose parents receive the full additional means tested child tax credit, will receive child trust fund vouchers for £500 instead of £250.

The new Government proposes to end Government contributions to this scheme in January 2010 which will mean that any child already in the scheme may not get the second voucher.

The voucher can be invested in a Child Trust Fund from a number of different financial institutions called providers. In addition up to £1,200 a year can be invested in the account by parents from their own money or gifts from others, e.g. grandparents.

The money in the Child Trust Fund is free of all tax. Also the providers must provide stakeholder products which means there are maximum charges laid down by the Government. As the scheme lasts for 18 years, it would probably be most profitable to invest in a shares based investment.

Who can invest One parent or guardian of an eligible child.

How worthwhile At a return of 4% a year, the £250 will be worth about £500 at age 18 plus the £250 paid at age seven will be worth about £400 making a total of £900. If the parent adds the maximum extra £1,200 each year, the total will increase to about £33,000 probably enough to finance higher education or to buy a sports car or a Harley Davidson.

Theses returns could be achieved by any form of investment. However the structure of the scheme ensures that the money goes entirely to the child and cannot be used by the parents before the child is age 18. This could be viewed as either an advantage or a disadvantage depending on how responsible with money the parent or child turns out to be. For other ways of investing for children, click here.

Minimum The £250 or £500 voucher.

Maximum £1,200 a year plus any extra given by the Government.

Suitable Small lump sums. Regular savings.

Money back The money cannot be taken out until the child is age 18. However the parent in charge of the account can change providers whenever he or she likes. From age 16, the child can make this decision.

Interest Variable. There is a choice of different types of investments including deposit account at a bank or building society, friendly society policies, accounts which invest in share through an OEIC or unit trust

Interest paid Accumulated until the child is age 18.

Tax The investment is tax free. However a child's income and gains within the maximum for this scheme would also generally be tax free as they would be below the child's single person's allowance or capital gains tax exemption limit. For the wealthy, however, this is an additional tax shelter. For how a child's income is taxed, see Children's Investments.

Fees to pay Depends on the type of investment. Charges on investments in OEICS or unit trusts are likely to be around 1½% a year which is not a 'low' charge. Index tracker funds which usually charge less than this, say ½% a year, are conspicuous by their absense in the lists of funds available. There will be no charge to change providers other than commission to sell a quoted share.

Passbook Statement will be sent. If you don't invest the voucher within 12 months, the Government will do it for you.

Risk Depends on the type of provider and investment you choose.

How to invest When you get the voucher for your child, contact one of the Child Trust Fund Providers or Distributors which offers the type of investment you consider best, e.g. index-tracker, savings account.

Where from Banks and building societies. Also see the Child Trust Fund web site for other providers and distributors.

Contents

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Last updated 25 May 2010..