The first children to qualify for the Government’s Child Trust Fund (CTF) will
celebrate their seventh birthdays this September. As their parents prepare
to receive their second investment voucher of £250, Times Money
looks at the scheme and how successful it has been.
The CTF was launched in April 2005 as a way to provide every child in the UK
with a nest egg that would mature when they reached 18. So far more than 4.4
million accounts have been opened.
All children born on or after September 1, 2002, living in the UK and whose
parents receive child benefit, qualify for two payments of £250 — one at
birth and one when they reach 7. Those from lower-income households receive
£500 at birth and at 7.
On top of this, parents, family and friends can contribute £1,200 a year. A
further £100 a year is paid into the CTFs of all disabled children while
those with severe disabilities receive an annual £200.
The money, which builds up free of any income tax or capital gains tax, can be
invested in one of two ways. The first, and more conservative, option is to
put it into a deposit account. Figures from Moneyfacts, the financial
research group, show that the best interest rate by a wide margin is the 5
per cent on offer from the Hanley Economic Building Society. Yorkshire
Building Society is the next best with 3 per cent, though this includes a
bonus of 0.7 percentage points, which drops away after 12 months.
The Hanley CTF account rate, which beats all conventional instant-access and
notice accounts, is bettered only by the 6 per cent of Halifax’s Children’s
Regular Saver account. However, the Hanley account can be opened and
operated only by going in person to one of the society’s five branches, all
located around Stoke-on-Trent. It is also the only CTF savings account that
does not allow transfers in from other funds.
The Yorkshire CTF, which can be operated by branch or post, is more accessible
and, though the 3 per cent rate is considerably lower, it still competes
well with most other savings accounts.
Samantha Owens, of Moneyfacts, says: “The attraction of putting your CTF money
in a savings account is that it is easy to understand — you can see your
savings build, year by year. For more cautious investors there is the added
bonus that the capital put in will not be at risk of falling in value. You
could achieve better returns by going for the stock market option, but this
would involve more risk. It depends on what people feel comfortable with.”
In fact, most CTF accounts (79 per cent) are invested in the stock market.
This might surprise many people, but not David White, of the Children’s
Mutual Society.
He says: “We think that stocks and shares are the place to invest your
long-term savings — and a timespan of 18 years certainly counts as long
term. We are so convinced of this that we made a conscious decision not to
offer a deposit account option with our CTFs. They are all stock
market-based funds.”
Because many people are nervous of the risks associated with share investment,
the Government requires every provider of equity CTFs to offer a stakeholder
version that has to meet three rules: there must be no initial charges, the
annual charge must be no higher than 1.5 per cent and, from year 13 on, the
fund must gradually move out of shares and into cash or bonds to make sure
that the CTF is not badly harmed by any stock market crash in its final
years.
The Government has shown a clear preference for share-based funds. The quarter
of parents who do not actively select either one or the other are put, by
default, into a stakeholder CTF. The money is allocated in rotation to a
panel of 14 CTF providers.
But a recent comparison of CTFs invested in the stock market with cash-based
CTFs shows that, to date, the cash funds are beating the equity funds. The
figures, from Investment Life & Pensions Moneyfacts, reveal that
in the four years from the scheme’s launch in April 2005 to April 2009,
stakeholder CTFs recorded an average loss of 7 per cent, while cash CTFs
produced a positive return of 24 per cent.
However, Richard Eagling, editor of Investment Life & Pensions
Moneyfacts, says: “Although the stock market turmoil has meant
disappointing returns for stakeholder accounts so far, the long-term nature
of the Child Trust Fund should ensure that there is plenty of time for a
recovery.”
The Children’s Mutual has calculated that if CTFs had been available for the
past 18 years, an investment of £250 at the start and another seven years
later would have grown to £862 in a cash CTF while the same sum in a
share-based CTF would have produced £1,185.
Most parents opting for an equity-based CTF select a stakeholder fund. They
are generally tracker or balanced managed funds that tend to be lower risk
than other options such as emerging markets funds. However, parents do not
have to select a stakeholder; instead they could pick pretty well any fund
from the 2,000 or so available to UK private investors. The charges on
non-stakeholder funds are little different from stakeholders, though both
the potential risks and rewards are higher.
Anyone skilled (or lucky) enough to have picked one of the 24 topperforming
funds between April 2005 and this month would have doubled the value of the
investment. The best — Scottish Widows Latin American — has returned 162 per
cent.
One of the Government’s aims in launching the CTF was to promote the savings
habit. Before the fund’s introduction, a mere 18 per cent of parents saved
on behalf of their children. Now about 50 per cent of CTF accounts have
money added to them, with 8 per cent of parents paying in a lump sum and 46
per cent making regular monthly savings.
Case study
When Tracey and Mark Gray’s daughter Caitlin was born in September 2002 she
became one of the first children to qualify for the Child Trust Fund (CTF).
Along with other children born on or after September 1, 2002, she received
£250 to go into a CTF savings scheme of her parents’ choice.
“It was quite a difficult decision as there are dozens of CTFs to choose
from,” says Mrs Gray, pictured with Caitlin and her sister, Madeleine, 3,
above. “We chose the Children’s Mutual because it was one of the biggest
players in the field. We picked the stakeholder option, which features the
Insight Investment Foundation Growth Fund.”
On top of the £250 lump sum contributed by the Government, the Grays pay in
£70 a month so that Caitlin will have a sizeable nest egg when she reaches
18. Her fund is now worth about £3,250 and she will receive a second CTF
voucher worth £250 after her seventh birthday next month.
Madeleine also has a CTF, which is now worth nearly £2,300. Mrs Gray says: “We
are contributing to both CTFs through an escalator scheme, which starts at
£50 a month and goes up each year by £10 a month until it reaches £100 a
month. It’s quite a commitment but we think that it’s important to give them
a good financial start in life.”
How to open a CTF account
All a parent needs to open a CTF account is the voucher sent out by Revenue &
Customs.
It pays to do some research, as there are more than 80 different CTF
providers. There are also several dozen distributors, including many high
street banks and building societies, which feed customers through to the CTF
providers.
You have to choose between three main types of account: a savings account, a
stocks and shares account and a stakeholder (a modified version of a share
account).
In some cases you may need to visit a branch, but many providers allow you to
open an account over the phone or internet using the reference number on
your voucher.
If you do not open an account before the expiry date on the voucher the funds
will be put in a stakeholder CTF automatically.
The person opening the account becomes the “registered contact” and retains
responsibility for running the account until the child reaches the age of
16, at which point the child takes over.
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