The Government’s Child Trust Fund (CTF) is finally up and running. This means that parents with children born on or after September 2002 can expect an information pack and a CTF voucher worth £250 to land on their doormats over the coming months. The money must be paid into a registered CTF plan (there are currently 75 providers) and, if you fail to do so within 12 months, the £250 will be invested automatically by the Inland Revenue in a default fund. There are basically two types of CTF: a stakeholder scheme that is an equity-backed investment where the money will be gradually moved into lower-risk investments when the child reaches 13; and a non-stakeholder CTF, which can be anything from a cash-based savings account to a straightforward equity fund. In addition, parents will be able to save up to £1,200 a year, tax-free, in their child’s CTF. If you invested the maximum amount over the entire term and averaged 7% growth a year, your child would have a fund worth £37,529 by the time he or she is 18.
This might sound like a mouthwatering amount of money, but other than taking the £250, parents should avoid this scheme “like the plague”, advises William Kay in The Sunday Times. In 15 years’ time, when the first 18-year-olds step forward to collect their loot, it is inconceivable that the Government will just hand it to them. As with pensions, the Government will claim that, as it has waived billions in tax, it is entitled to some say in how the money is spent, and will probably simply issue teenagers with more vouchers – this time to spend on worthy causes, such as university fees.
The best thing to do would be to invest the £250 handout “as riskily as you like” – financial advisers have been putting their children’s money into Asian funds – leave them to grow for 15 years, and then lock in your gains by switching to something more conservative. If you wish to invest more, ask a solicitor to set up a bare trust. You can then invest in whatever you like and withdraw money at any time as long as it benefits the child. Any income is tax-free up to the normal personal allowance, at present £4,745, which should be good for capital of around £100,000. In this way, capital gains will be sheltered by the annual allowance and tapering relief, “and Brown’s successors will not be able to tell you or your children how to spend the money”.
Some equity-based funds will obviously turn out to be “duds”, says Paul Farrow in The Sunday Telegraph, so choose carefully. The Children’s Mutual is offering funds run by fund managers with proven track records, such as Invesco Perpetual’s Neil Woodford, while the Share Centre has funds run by Jupiter and Artemis. The most important thing is not to leave it in the bank, says Christine Seib in The Times. Calculations by Mark Dampier, head of research at Hargreaves Lansdown, show that £250 invested in a FTSE 100 tracker in 1987 would be worth £1,434, compared with £564 in a Halifax deposit account.
For more details and best-buy tables, to be updated over the coming weeks, see www.savingforchildren.co.uk and www.childtrustfund.gov.uk.