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Child Trust Funds

The Child Trust Fund (CTF) is a Government savings scheme that came into effect on 6 April 2005. It is open to children receiving Child Benefit who were born on or after 1 September 2002. The Government provides a minimum of £250 in the form of a voucher, to be given to one of the Child Trust Fund providers to open a tax-free account on behalf of the child.

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Key Features at a glance

• Additional deposits up to a maximum of £1,200 each year, can be made by parents, grandparents and friends.
• When the child reaches the age of seven the Government will donate a further £250 to the account.Children in low income families will receive an additional £250.
• At age 16 the child can begin to make decisions about how the money is managed.
• No withdrawals are permitted until the child is 18.
• Once the child is 18, the Child Trust Fund will close and the funds will be made available to them, alternatively funds may be transferred to an ISA. 
• If a Child Trust Fund account is not opened before the voucher expires (12 months from issue) the HM Revenue & Customs will open a stakeholder CTF account.

Choice of Investment

There are three types of investment to choose from, depending on attitude to risk:

• A cash deposit account available from a bank or building society.
• An equity based investment provided by a friendly society, insurance company or investment fund manager.
• A stakeholder account offering an equity option.

Each has its own benefits and pitfalls. A cash based account may appear to be the safest option , attracting no charges, but if interest rates are low, inflation could erode any returns and it may not perform over the longer term.

Stocks and shares, perhaps the most risky investment strategy, attract charges, but in return has the potential for higher returns over the longer term.

Finally, the Government-preferred stakeholder , 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.