The Child Trust Fund (CTF) is a tax-free way of saving for your children. Every eligible child will at birth receive a voucher worth at least £250 to invest in a CTF. The government will make a further contribution of at least £250 when the child turns seven. In addition, up to £1,200 a year extra can be added to each account by family members and friends and the money cannot be withdrawn until the child turns18.
The CTF is an excellent way of saving money for your child’s future expenses (such as university fees or the deposit on a home). To ensure that your child gains maximum benefit from his or her CTF in the future, it is crucial that you understand the three options that are available. Two of these options involve some risk to the money in your child’s CTF. However, the same two options are also likely to provide more money for your child when they reach 18.
Option One – Savings Accounts
This is the low risk option, but it is also the option that, going by past returns, is likely to earn the lowest amount of money for your child by the time they reach 18. It works in much the same way as a normal cash deposit account.
Option Two – Accounts that invest in shares, bonds or a mix of the two
This option does involve some stock market risk to your child’s money, but because it has to be invested for at least 18 years, it is likely to provide more money for your child than if you put the money in a savings account.
It is also the most flexible option, as it gives you a number of investment choices. For example, you may choose to invest the CTF directly in the shares or bonds of just one company, or you could invest in a number of different companies. In addition, if you’re not sure about which companies to invest in, or you’d like to hold the shares or bonds of a large number of companies, you can invest in Investment Funds which use professional managers to choose a range of shares and/or bonds on your behalf.
Option Three – Stakeholder Accounts
This option involves a concept called “Lifestyling”. It provides a one-stop strategy that makes the investment decisions on your behalf. This option comprises a mix of shares and bonds chosen on behalf of your child by the company managing your money and is altered depending on how close your child is to reaching 18. It is riskier than a savings account, but that risk is managed with a view to making the value of your child’s CTF grow more.
The annual charge on this option is limited to a maximum of 1.5 per cent – which means there will be a charge of no more than £1.50 a year for every £100 in the account. The charges on the other two options are not limited in this way.
The different stages in a child’s life
The registered contact (parent or guardian) of the child is responsible for opening, administering and making investment decisions on behalf of the child. While friends and family can make contributions of up to £1,200 a year into the CTF, the child will be the only one who can withdraw the money when they turn 18.
The government has pledged that it will put into place an education programme to get children interested in financial affairs and prepare them to be able to manage their CTF money once they reach 18.
Age 7
A further payment of £250 will be made by the government to each child to link in with financial education in primary schools. Children from low income families will receive £500.
Age 13
If you chose to invest the child’s voucher and additional contributions into a stakeholder CTF, the provider (unless otherwise instructed) will start to move the investments out of stocks and shares and will gradually move the money into less risky investments closer to the child’s 18th birthday. This is known as “Lifestyling” as mentioned earlier.
Age 16
When a child reaches 16, the parent or guardian managing the account will cease to be the registered contact. This right will be reserved for the child, however, the child must apply to the provider of the account to take over these rights; they will not be automatically transferred. If the child doesn’t apply there will be no registered contact for the CTF and no statements will be sent out. By becoming the registered contact, all statements will be sent to the child and the child will be responsible for the investment of the money in the account; they will still not be able to withdraw any of the money.
Age 18
When the child reaches 18, the provider of the CTF will write to the child with a valuation of the amount of money held in their CTF as at their 18th birthday. From that day on, the account will no longer be a CTF. The money will stop benefiting from the tax advantages of a CTF and will be subject to the normal rules of the investment in which it is situated. The child will be entitled to use the money as they see fit (they may, for example, put it towards a deposit for a house or university fees). It is worth noting that, while the parent or guardian can influence how their child uses their money, the final decision rests with the child.
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