Child Trust Funds (CTFs) were introduced by the Government in 2005 to encourage parents to save for their children's future About three million children now have funds.

Children gain access to the pot of cash in a CTF only when they turn 18, but nobody else, including parents, can access the money before that point. The interest earned by savings in a CTF are tax-free.

Who is eligible?

Any child born after September 1, 2002, who qualifies for child benefit, is eligible for a CTF. Children born after the introduction of CTFs in April 2005 are enrolled automatically. The Government sends parents a £250 voucher to open a fund and they can invest this in either a savings account or one that invests in stocks and shares (see below for information on the types of funds available).

How to save

BACKGROUND

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Families on income support are given a total of £500.

When children reach the age of seven they are sent a further £250 or £500 by the Government.

The Government will open a stakeholder Child Trust Fund automatically if a child's parents fail to do so within 12 months of the voucher being issued.

Parents of children born between September 2002 and April 2005 should apply for their children retrospectively. For more information, or if you have not received the voucher, call the Child Trust Fund helpline on 0845 3021470 or textphone on 0845 3667870.

Who can contribute?

Parents and relatives are encouraged to make regular contributions to the trust fund, although they can do so whenever they choose.

The maximum that can be paid into an account is £100 a month, or £1,200 a year. Government contributions do not count towards this limit.

The average amount that parents deposit each month is £23, according to figures from Revenue & Customs. Other research, by Nationwide Building Society, found that 60 per cent of CTF accounts received no additional contributions at all.

What are the benefits?

The idea is that the nest egg should grow in value over time. When children have access to the cash at the age of 18, they can then use it to pay for university, a deposit on a house or anything else they choose.

You can find out how big a fund will be when a child reaches the age of 18 by using a Child Trust Fund calculator.

The three options

There is a huge range of different CTFs available, particularly if you go online. It seems that everyone from Asda to Legal & General offer CTFs of some description. Indeed, there are many funds catering for niche markets, such as ethical or shariah compliant funds.

There are three main types of fund.

Savings accounts:

A savings account is the most secure option and mirrors the deposit accounts available on the high street, though the rates are usually a little better. There are also no tax liabilities.

Stakeholders:

Most experts recommend opting for a stakeholder equity fund, as these take advantage of stock market growth and are likely to produce a greater return than cash-only acccounts over the longer term. Your cash is invested in the stock market but is managed by your fund provider. Parents have a limited choice of the types of funds in which the money is invested.

The Government has made sure that the level of risk is small. When a child reaches the age of 13 the money will be moved to safer, cash-based accounts.

The Government has also capped the annual management charge on stakeholder CTFs at 1.5 per cent.

Stocks and shares:

The final option is a purely stock market-based option. This is the riskiest form of investment and allows for the greatest degree of investment freedom. Parents should remember that the management fees on these investments are not capped in the same way as stakeholder CTFs.

Over the long term it is likely that the return on stock market investments will be greater than cash investments, but parents should be aware that the value of the CTF can go down as well as up, although this is unlikely.

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