Parents who want to put their child trust fund (CTF) vouchers to work as soon as possible need to make up their minds how to do so by the 6 April launch. When deciding where to put the money (£250 for each child born since September 2002, plus up to £1,200 per year in the form of top ups from relatives or friends), parents have three choices: a cash deposit account; a ‘stakeholder’ equity fund with charges capped at 1.5%, which switches to less risky investments once the child reaches 13; and a share-based fund with higher costs, but which can stay fully invested in the stockmarket throughout. The decision should be a no-brainer. According to Barclays Capital, cash only produced a better return than shares in one period of 18 consecutive years during the last century. Unfortunately, surveys reveal that as many as nine out of ten parents are planning to go for the cash option.
For those who are more sensible, what’s available? At the latest count, there were 92 firms offering CTFs, of which Foreign & Colonial is the only pure fund management firm. Thankfully, there are some good fund managers hidden behind some of the other companies, which range from building societies to financial advisers. One “overlooked gem”, according to Citywire, is the Walker Crips Stockbrokers offering, which allows discounted access to its range of three unit trusts, all run by Jan Luthman and Stephen Bailey, who have the maximum Citywire AAA-rating for their “first-class risk-adjusted performance”. Active investors might prefer to use Comdirect’s Self-Select Shares scheme, which lets you invest in any fund or quoted share. The only charge levied by Comdirect is a £12.50 transaction fee for trades, although investors will have to pay all the usual fees on funds, rather than the discounted CTF rates.
The Share Centre also offers choice with its non-stakeholder Child Investment Account, and it has negotiated big discounts (0.25% instead of a typical 5%) on four funds it deems particularly suitable for a CTF: Close UK Escalator 100, Legal & General UK Index trust, Artemis UK Growth and Jupiter Global Opportunities. Of these, the only one with a manager good enough to have a Citywire rating is Artemis, run by AA-rated Adrian Paterson. If you’re worried about charges, you may prefer a cheap stakeholder. Most are trackers, but you can access top managers through them. Family Investments offers an “attractive” stakeholder CTF, according to Investors Chronicle, that invests in a fund managed by New Star Asset Management. But whatever you do, bear in mind that the government of the day in 18 years’ time may decide how the CTF is used. The best way to stay in charge may be to take as big a risk as you dare with your £250 voucher and set up a bare trust for any additional savings.
How to make the most of CTF tax breaks
Aside from the cash handout, child trust funds (CTFs) do provide some tax breaks, says Robert Budden in the FT. All gains will be free of capital gains tax (CGT) and you can roll up all dividend income or interest tax-free. But you need to be saving pretty big sums in a CTF before the CGT exemption is worth anything, and there is always the danger that a future government will help you to decide how to spend your child’s money.
To avoid this, you may want to put only the money that you have to in a CTF and set up a ‘bare trust’ – the most basic (and inflexible) form of trust, which enables an adult to invest any extra money on a child’s behalf until they reach 18, at which point they have full control of the money. Income and capital gains are taxed as the child’s own and offset against their tax allowances (£4,745 and £8,200 respectively for the current tax year). Since parents investing for children still have to pay tax on any income over £100, bare trusts work best if gifts are seen to be made by someone other than a parent. Bare trusts also keep the investment outside the giver’s estate for inheritance-tax purposes. To set up a bare trust, ask the provider of your chosen bank account or investment scheme for a ‘declaration of trust’ form. Alternatively, include a covering letter saying that you are investing on behalf of your child.
For more information, see www.step.org.