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Child Trust Fund - What a Difference a Year Makes

The first batch of Child Trust Fund (CTF) vouchers issued in January and February 2005 are now a year old. Any unused vouchers will soon be automatically invested by the Government with one of the 11 approved providers of default stakeholder accounts.

Background

The CTF came into effect on 6 April 2005, for children who were born on or after 1 September 2002 and registered to receive Child Benefit. Under the initiative the Government provides a voucher, to be presented to one of the CTF providers to open a tax free account on behalf of the child. The scheme is intended to provide the child with a financial start to their adult life, as the funds cannot be touched until age 18. According to figures published by HM Revenue and Customs, 2.135 million vouchers had been issued as at November 2005 with just over half being used so far to open an account. So why have so many parents not taken up this opportunity? Are they still confused as to which type of Child Trust Fund account to choose and are they in need of guidance?

Making the right choice

Choosing the right type of account is not an easy task and expert advice should be taken if in any doubt.

There are three types of investment to choose from, depending on attitude to risk. First a cash deposit account available from a bank or building society which may on the face of it appear to be the safest option. This type of account attracts no charges, but if interest rates are low, inflation could erode any returns and it may not perform over the longer term. Secondly an equity based investment provided by a friendly society, insurance company or investment fund manager. This is perhaps the most risky investment strategy, will attract charges, but has the potential for higher returns over the longer term. Finally, the Government-preferred stakeholder option, which initially is invested in stocks and shares, but will be moved to lower risk investments at age 13 to minimise any falls in the stock market jeopardising the investment.

What a difference a year makes

Depending on the type of CTF investment that a parent may have originally chosen, the difference in interest lost by delaying investment for a year can vary considerably. Moneyfacts has looked at different types of investments available and compared performances.The table below shows the results.

For full details of the accounts available see pages 34 and 35. Full details of the Equity based options can be found in our sister publication, Investment Life & Pensions Moneyfacts: to subscribe online visit www.moneyfacts.co.uk/subscribe.

Paul Winter, Sales and Marketing Director for Ipswich BS, commenting on their cash based product, said: “The Ipswich’s straightforward cash option has proved extremely popular with parents both in its operating region and further afield. Recent Building Society Association (BSA) statistics show that over 221,000 cash CTF accounts were opened nationally last year. In the last quarter alone the Society has attracted an incredible 4,000 accounts which equates to 8% of the cash market; that’s forty times our expected performance level based on asset size. Approximately 20% of these new account holders have already made additional subscriptions to their account.”

The choice is still available

Parents will be advised of the account opened on their behalf, but should look closely at the details as it may not be their preferred choice. Recent figures from the BSA indicate that, where parents have a choice between cash and stakeholder Child Trust Fund accounts, 74% opted for the cash-based option.

Commenting on the January figures, Brian Morris, Head of Savings Policy at the BSA said: “More parents opened a cash CTF in January than in any of the previous six months. This is encouraging and is probably due to higher awareness following a further round of government advertising. But any parent who still has a voucher sitting at home, should act now. Children are missing out on any interest paid on the account and the longer the delay, the less they will receive on their 18th birthday.”

With unused vouchers soon being allocated to a stakeholder Child Trust Fund, many parents may well be disappointed and be looking to invest elsewhere. Whilst it would have been easier to have invested the voucher within the first 12 months, it will still be possible for parents to transfer to another provider if they are not happy with the Government’s choice.