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Child Trust Funds |
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Some of them may look cute but they are all horribly expensive. Madeline Thomas, a former Reuters money reporter and leading UK personal finance journalist, on five of the very best savings schemes for kids. Click to view Top 5 Kids Savings Schemes.
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Best for New Babies (Child Trust Funds) |
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 A Child Trust Fund is a must-have for every child born on or after 1 September 2002. They are cheap, flexible and tax-free. Best of all, the government will give you at least £250 to open one - more if you are on a low income. If you still have your voucher stuck to the fridge door, invest it now. You’d be mad not to. |
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Child Trust Funds were set up by the government to encourage parents to build up a next egg for each of their newborn children. Those lucky enough to qualify – children born on or after 1 September 2002 - are sent a voucher worth at least £250 per child to get the ball rolling. Parents, friends and family can invest a further £1,200 between them each year. The money grows tax-free and no one can touch it except the child - and only then once they turn 18.
The government is so convinced Child Trust funds are the right way to go that, if you don’t open an account with your voucher within a year of receiving it, it will open one for you. |
Tax Free |
 Those who choose a plan themselves have two basic options: A “cash” Child Trust Fund which, like a building society account, offers total security but little potential for growth; or an “equity” Child Trust Fund, which is linked to the stockmarket and offers greater potential for growth but less security.
Most experts agree that, because the money in Child Trust Funds is being invested over a long period of time (18 years minimum), stockmarket plans are the better option at the outset. This is because, even if the market falls in the early years, there will remain plenty of time to make-up those losses and more. Also, when a child nears 18 – and may require the money to pay their university fees, say – the balance can be moved out of the stockmarket and into a cash account to provide greater security.
So which Child Trust Fund should you go for?
If you think the stockmarket is too risky a place for your hard earned cash (and a quarter of those who have opened a Child Trust Fund account do) go for the Yorkshire Building Society’s cash Child Trust Fund – the current market leader. It pays an annual rate of interest of 6.10%, with an extra 0.7% bonus thrown in for the first year only, taking it to 6.80%.
“These rates could go down, so you’ll need to keep an eye on them. But it’s free to switch between Child Trust Fund accounts so you can keep chasing the best rate,” says the Consumer Association. |
Highly Flexible |
Those wanting to invest in the stockmarket should consider a “tracker” fund – they track the performance of the stockmarket in which they invest so they take less managing to produce similar returns. Theoretically, that should mean lower charges.
One tracker that has no initial fee and that sticks to an annual charge of just 0.5% is the Foreign & Colonial Stakeholder Child Trust Fund. It tracks the FTSE All Share Index – giving you exposure to the mainstay of the British stockmarket.
“There are no exit penalties should you decide to move to a different Child Trust Fund in the future,” notes Bestinvest, a firm of independent financial advisers.
As a final alternative you could go for an “actively managed” stock market fund instead of a tracker. These funds do not simply mirror the stock market index but employ a manager to pick what they hope will be the best performing shares. They can do better than trackers but picking the right is hit and miss and they tend to be considerably more expensive.
If you want one of these funds you should approach an independent financial adviser. |
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Pros:
- Government gives you £250 at start
- Flexible investment options
- Switch accounts at any time without charge
- Tax free
Cons
- Not available for children born before 1/10/02
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