A Guide to the Child Trust Fund
Understanding How to Choose From the Best Child Trust Fund Deals
Sep 1, 2009
Children who were born on or after 1st September 2002, and who are eligible for Child Benefit, will qualify for a specially designed savings scheme set up by the government. This scheme, known as the Child Trust Fund (CTF), gives children a series of payments from the state to help them out financially in the future.
Why was the Child Trust Fund Established?
The payments given under the scheme are meant to be invested on behalf of children to give them a financial boost when they reach the age of 18. The system was also set up with a view to allowing other family members to supplement the state investment if they wished or were able to do so.
Another aim here was to encourage children to become involved in the savings process by giving them an account of their own. It is hoped that this will help children start off life with an inclination towards saving and a better financial understanding. So, how do Child Trust Funds work?
How the Child Trust Fund Works
The system works by giving vouchers that a child's parents can use to open and then to supplement a Child Trust Fund account on behalf of their son or daughter. These vouchers can only be used for this purpose and the account opened cannot be used until the child in question turns 18.
The account provider and type can, however, be changed and children will be given a say in the fund's management once they reach the age of 16. If parents fail to open an account, then a stakeholder account will be opened by the state on behalf of the child. The system basically involves:
- A £250 voucher when the child is born (an additional £250 is given to low income families at this stage)
- A £250 voucher when the child turns 7 (an additional £250 is again given to low income families at this stage)
- An extra £1,200 a year can be invested into the Child Trust Fund account by the child's parents, family and friends if they wish to boost the fund
Accounts That Can be Used for a Child Trust FundThere are basically three primary options open to parents here. These are:
- Savings accounts
- Investment (i.e. share) based accounts
- Stakeholder accounts (i.e. lower risk share based accounts that are monitored by the Government)
Choosing the best Child Trust Fund account could be vital here. Each of the options has a range of advantages and disadvantages in terms of potential returns. For example:
- Savings accounts are a safe investment but may not give as good returns as an investment based account.
- Investment/share accounts could give fantastic returns if the stock market does well but could give lower returns than savings accounts if the markets don't perform well.
- Stakeholder accounts could take a middle ground stance. They are state-regulated investment accounts that spread investment risk and that will gradually move into safer investments such as cash savings as the child gets older. They may therefore do better than savings accounts if all goes well. They may also do well if the stock market does OK but won't give as high a return as investment/share accounts as they are designed to invest more conservatively.
Choosing the best Child Trust Fund for a child really will come down to parental preference. The level of risk will also usually play a part. Some parents are prepared to take the risk of potentially seeing lower returns with a shares based product in the hope that the markets will work some magic for them in the long run. Others will simply play a safe game and invest in a savings account, or they may be prepared to take a slightly increased risk with a stakeholder product.
Parents looking for other ways to save tax free for the future may also be interested in taking a look at "A Guide to Tax Free Savings"
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