THE government has bowed to pressure from investment firms and will allow them to charge 1.5% a year for child trust funds, rather than the 1% fee it originally proposed, writes Kathryn Cooper.

The move could cost a typical family an extra £2,000 in charges over 18 years.

Child trust funds are designed to help families build up a nest egg for their children by the age of 18. Anyone born after September 2002 will be eligible for an account, even though the schemes will not be available until April 2005.

The government will contribute £250 when the account is opened, or £500 if the child is from a family with an annual income of less than £13,230. Children born between September 2002 and April 2005 will get between £6 and £27 on top of the £250 to make up for the fact that they had to wait to open an account.

The government will provide a further top-up on the child’s seventh birthday, although it has not specified the amount.

Family and friends will be able to contribute up to £1,200 a year to the funds. You will not be able to carry forward unused contributions from one year to the next. Companies must accept contributions of at least £10 a month.

Children will not be able to touch their funds until the age of 18. Until then, the money will grow free of income tax. No capital-gains tax will be due on any profits when the assets are sold.

There will be two types of child trust fund: stakeholder and non-stakeholder accounts. Parents who do not specify the type of account they want will automatically get a stakeholder plan and the fees will be capped at 1.5%. Firms will be able to charge more for non-stakeholder schemes.

If the government paid £250 into a child trust fund at birth and on the child’s seventh birthday, and family and friends then paid in the full £1,200 a year until the age of 18, the child would have £39,923 at maturity, assuming a charge of 1% and growth of 7% a year. But the child would have only £37,873 if the annual fee were 1.5%.

All companies will have to provide a stakeholder account, which must be invested primarily in equities. Firms must reduce the amount of risk taken by the funds as they approach maturity unless the family asks them not to. The manager might, for example, increase the amount in bonds and cash to make sure children do not suffer a big loss just before they access their fund.