Choosing a Child Trust Fund

13th February 2009

In simple terms, they are a long-term savings and investment account for the benefit of children.  The account belongs to the child but they cannot access the money until their 18th birthday.  Any capital gains or income within the CTF is free of tax for both the parent and child.  

Government contributions

Shortly after your child is born, assuming they are eligible, you will receive a voucher to open a CTF account.  For most children this voucher will be worth £250, but the amount is doubled to £500 for families on income support.  

When your child reaches their seventh birthday they receive an additional Government contribution valued at £250 (or £500 if the family is in receipt of income support). Unlike the first payment at birth, the contribution at age 7 is paid directly into the Child Trust Fund account.  

You have up to one year to select a CTF account for the voucher.  After this time, HM Revenue & Customs will make the investment decision on your behalf and automatically invest your voucher in a new account.  Because the CTF account and underlying investments selected by HM Revenue & Customs may not suit your individual circumstances, you should make the decision yourself on receipt of the CTF voucher.

Additional payments

In addition to the investment of the vouchers, it is possible to invest up to £1,200 each year into the account.  These extra payments can come from parents, family or friends. It is important to note that the £1,200 a year limit applies to each account rather than each source of payment.

It is not possible to withdraw money - either the vouchers or any additional payments - from the CTF once it has been put in. Money can only be removed from the account by the child on or after their 18th birthday. 

Different types of accounts

Whilst the concept of a Child Trust Fund is quite simple, making an investment decision is often challenging.  There is a wide choice of around 70 different CTF account providers - including banks, friendly societies and fund managers.  Choosing the most suitable CTF account for your child can be difficult.

There are different types of Child Trust Fund and you need to select the most appropriate type of account for your child.  The two main choices are between a deposit (cash) CTF account or a CTF account invested in company shares (equities) and other types of investment. 

Investing the CTF voucher into a cash CTF account is the simplest option. These operate just like a bank account; adding interest to the value of the account each month or year. This interest is paid gross and is not subject to income tax within the tax-efficient environment of a CTF account. The interest rate on offer will vary between different providers, so it is important to shop around to find the most competitive rate of interest.

The other main option is to invest in a fund invested in company shares. Unlike cash, this comes with the risk of capital loss and the value will fluctuate in line with the performance of the fund.  However, the long-term returns from this type of investment are likely to be better than those available from cash. As a Child Trust Fund is a long term investment of eighteen years, this approach is often more suitable, assuming you can tolerate the risk.

Stakeholder or non-stakeholder?

Just to complicate things a little further, there is also the choice to make between Stakeholder and non-Stakeholder CTF accounts. 

A Stakeholder account has certain features to ensure the overall charges are limited.  The annual management charge must not exceed 1.5% a year.  If you have £250 invested in your CTF account, the annual charge would not exceed £3.75 a year.  In addition, the provider of the account must be prepared to accept additional top-up payments starting at £10.

A non-Stakeholder account does not have the same restriction on charges or contribution levels. For this reason, these are able to offer access to a wider range of investment funds. Whilst you might pay a little more for ongoing management, you do get the prospect of access to better performing funds, although of course this is not guaranteed.

Other factors

It is possible to swap between different CTF accounts in the future. This means that you can start by investing in riskier shares and then move to a more secure cash deposit as your child gets older, or vice-versa. 

Whilst your child cannot access the CTF account until their 18th birthday, they are able to make their own decisions about how the money is invested from their 16th birthday.  Bear in mind that, by this time, the fund could be substantial - particularly if you or other relatives have been making additional contributions each year. You may or may not relish the prospect of your 16 year old child making their own investment decisions about what could by then be a sizeable sum of money.

The consequences of making additional contributions and creating a sizeable Child Trust Fund account value is also something to consider. Many parents fear that the Child Trust Fund account they are building for their child will become a 'motorcycle fund' or used for something else other than the original intention. Because the value of the CTF account belongs to your child from their 18th birthday, you might wish to use a different types of savings vehicle (albeit without the associated tax benefits) for things like University funding or saving towards the deposit on a first property.

When your child reaches their 18th birthday, they now have the option of rolling the value of the CTF account into an Individual Savings Account (ISA) in their name.  This would allow them to keep the money invested for the future in a similar tax-efficient environment.

Martin Bamford is a Chartered Financial Planner and Certified Financial Planner certificant for Informed Choice; an award-winning firm of Chartered Financial Planners working with individual and small business clients in Surrey and the surrounding counties to help them to build, manage and protect their wealth.  

To request a new client welcome pack and arrange an initial meeting with no cost or obligation, please call Informed Choice on 01483 274566 or email hello@icl-ifa.co.uk. 

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