The Child Trust Fund is a government scheme to help save for your children’s future. It is available to all children born after the 1st September 2002 and whose parents are claiming Child Benefit.
Once you have started to claim Child Beneift then the government should automatically send you out a voucher to start your child’s trust fund within one month’s time.
The voucher will be for £250 unless you are on a low income, below £14,155 a year, then you will receive £500 instead. When your child reaches the age of seven then you will get another voucher sent to you worth the same amount.
The vouchers are used to invest in a special account that your child will be able to access when they reach 18. Parents, family and friends can add up to £1,200 to the account each year. There is no tax to pay on the Child Trust Fund income or any gains (profits) it makes until your child reaches age 18.
There are three types of accounts that you can invest your vouchers in, depending on how much you want to make and how much risk you are prepared to take.
Option 1: Accounts that invest in shares.
These accounts invest in companies by buying shares in them and when they do well the shares go up in value and you make money. These accounts are potentially the most profitable as the money will be invested for a number of years and in the past these long term investments in shares have grown much more than the same amount left in a traditional savings account. However with this type of investment also comes a high risk as shares can go down as well as up and if the companies you have bought shares in do badly then you can end up with less money than you invested.
Option 2: A Stakeholder Account.
These accounts also invest your money in shares but they are bound by government rules and so are different from normal shares accounts. Firstly they invest in a number of different companies so as to spread the risk and avoid losing all of your money if one company does badly. Secondly once your child reaches 13 the money in this account is gradually moved to lower risk investments or assets. This means that for the last 5 years of the account you may not gain as much profit from the shares but your money will be more protected against losses. This means that with this type of account you can still invest in shares to get gains from the stock market but it is also less risky as there is an element of protection and safety towards the end of the investment.
Option 3: A Savings Account.
With a traditional savings account you don’t have to invest in shares. Whatever money you put into the account you know will be there throughout the life of the fund and you will not be in any danger of losing any of it. This account gives you security, you know that your money is safe and guarenteed and will be there when your child is 18 along with any interest it has earned in that time. However the interest most providers will pay on a child trust fund savings account is not usually very high, often not matching the rate of inflation, and you will not make great gains on the amount even if left in the same account for the full term.
After deciding what type of account you wish to open you then need to find a provider to open the account. Most banks, building societies, friendly societies, insurance companies, investment trusts, and some high street shops all offer their own child trust fund accounts. It is worth shopping around and seeing what various providers offer before you decide where you open your account as there can be quite a big difference between accounts from provider to provider, especially if you are opening a traditional savings account where the interest rates offered can vary greatly.
Other things to consider when choosing a provider are; how easy is it to pay extra money in; is there a minimum amount when depositing; if you will get regular statements; is there an annual fee for running the account and how do you manage the account. When opening an account that invests in shares you should ask your potential providers for more information about the companies they invest in, about the risks involved and how to minimise such risks. Once opened it is worth keeping an eye on the account to see how well it is doing. You are able to change your provider at any time but if you have a shares account your current provider may deduct costs, from the selling of your shares and any handling costs, before they transfer you to your new provider.