Tuesday will mark a milestone for child trust funds (CTFs) when the first batch of seven-year-olds qualifies for a second government payment of £250. Yet a quarter of those eligible for the payouts never set up a CTF. So should you bother and, if so, which one is best?
The problem for new parents is lack of time and an overwhelming amount of information, says The Children’s Mutual, a CTF provider, in The Guardian. Once a baby arrives you have more pressing things to worry about than sorting out your child’s CTF. The good news is that if after a year you haven’t claimed your first voucher the government will set up a CTF for you. But you’ve still missed out on a year’s growth and the government will automatically open a stockmarket-based stakeholder fund (see below), which may not be the best option.
Assuming you set up a child trust fund yourself, you can choose between three different types. The simplest is a cash fund. This works like a savings account: the £250 earns interest, along with any further cash that you, family or friends choose to add – up to an annual limit of £1,200. Rates can be compared at Moneyfacts.co.uk. Currently the best is 5% with Hanley Economic Building Society.
The second type of CTF is the stockmarket account. These invest your money in shares. That’s riskier than holding cash, but the return you get over 18 years (the period before junior can access the money) should be much better. These accounts are harder to compare. “HMRC says it is not its job to provide comparison figures, even for those 17 companies on its approved list, and no one site yet collates and shares such information,” says Sam Dunn in The Observer.
Nonetheless, Darius McDermott of Chelsea Financial Services recommends Invesco Perpetual’s Income fund or the Gartmore US Opportunities fund (0845-077 1849).
A stakeholder CTF is similar to a stock market account, except the government imposes three rules. There must be no initial charge, the annual fee must be no higher than 1.5% and, after the 12th year, the fund must gradually move out of shares and into cash or bonds to protect it from a crash just before maturity. This type of CTF makes sense for investors happy to take a little more risk than a cash account. Capped fees are also attractive.
Whichever CTF you choose, don’t hang around before opening it – the longer you take, the lower the potential returns.