NEXT month the 1.6m youngsters born in Britain on or after September 1, 2002 can start earning interest or dividends on their child trust fund (CTF) vouchers.

But there is evidence that many parents remain unsure about where to invest the government’s gift. A survey by Moneyfacts, a data analyst, found that almost half of Britons were not aware of the scheme or how it works.

The CTF initiative is designed to encourage parents to save for their children’s futures. However, the Politeia economic forum recently warned that most CTFs would barely increase in value because of where they will be invested.

This is almost certainly true if, as expected, 40% of parents put the vouchers — worth between £250 and £500 — into a savings account.

Natalie Tate of Nationwide building society said: “We are currently receiving about 1,260 applications for our CTF savings account every day, compared with 740 for the stakeholder CTF.”

CTF savings accounts will pay up to 6% at launch. The best are from Britannia and Ipswich building societies, although only those living in the local area qualify for the Ipswich deal.

But statistics suggest equity-based CTFs will produce better returns over the term. Figures from F&C, a fund manager, reveal that £250 invested in an average savings account 18 years ago would now be worth about £650.

The same amount invested in the stock market would have turned into more than £1,400. And you can generally switch to another fund without penalty if the performance disappoints.

The government has pledged to make a further contribution, likely to be the same amount, to CTFs when the child is seven. However, whichever fund you choose, it is unlikely to make any real difference to your child’s future unless you invest some of your own money.

Parents and other relatives or friends can pay up to £1,200 a year into CTFs. But the range of vehicles available is not as wide as the government hoped because many investment managers have shunned the scheme.

There are only eight deposit accounts and many equity CTFs carry higher-than-average charges. Non-CTF trackers typically levy between 0.3% and 0.5%, while many stakeholder CTF trackers, including the Nationwide All-Share fund, charge 1.5%.

Jason Hollands of F&C said: “You should not assume that stakeholder plans are cheapest just because they have a 1.5% charge cap.”

There are tax advantages: all CTF gains will be free of capital-gains tax (CGT), and dividends and interest will be free of income tax. However, children qualify for the standard annual CGT exemption anyway, which can be used to avoid paying the tax on other investments.

And although a child’s savings can only earn tax-free dividend income or interest of up to £100 a year on money from parents, if it comes from other relatives or friends the normal personal allowance of £4,745 a year applies. Also, unlike money in a CTF, it is not tied up for 18 years.

We asked some of Britain’s leading financial advisers where they are investing their children’s CTF vouchers.

Tom McPhail of Hargreaves Lansdown plans to put his son Jackson’s vouchers into the Insight European Ethical fund through The Children’s Mutual. He said: “My girlfriend and I want to make sure the money is used in an ethical way — especially as we’re investing it for Jackson’s future. The fund has a good manager, but I was surprised at the dearth of ethical CTF options.”

Dominic Cummings of Bestinvest is opting for the F&C Stakeholder CTF — a FTSE All-Share tracker — for his daughter Pippa. He said: “I could use a self-select CTF, which would allow me to pick funds or shares, but the charges would be prohibitive on a £250 investment. However, if an attractive, actively managed CTF is launched I’ll certainly consider transferring.”

George Rendle of John Scott & Partners is investing for his son Charles. He said: “We received Charles’s vouchers last week and have been looking at the options. There is a very limited choice, but I plan to put the initial £250 into the HSBC UK Growth & Income fund.”

Richard Meek, a consultant at PSFM, is planning to use his daughter’s child benefit to top up her CTF. He said: “We received vouchers for my eight-month-old daughter Charlotte this week. I’m still researching the options, but will probably opt for a self-select CTF. It seems sensible to take some risk in the early years and I may take a bet on the First State Global Resources fund, which could offer some impressive growth.”

Darren Pearce of Chase de Vere has four children, but only the youngest — Oscar — qualifies for CTF vouchers from the government.

He said: “I am going for a non-stakeholder equity plan from The Children’s Mutual because it offers access to Invesco Perpetual Income, which is a well-managed fund. It also means I can set up similar schemes for my three older children.”

Nick Raynor of The Share Centre, a stockbroker, will qualify for CTF vouchers because his girlfriend, Melanie, is due to have their first child in May. He said: “I plan to contribute the annual maximum of £1,200 to a self-select CTF and want to take quite a high level of risk in the early stages.

“I will probably invest in oil-sector stocks, including smaller companies such as Burren Energy. But I will also look at funds focusing on the developing world, such as the F&C Latin American investment trust.”

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