THOUSANDS of parents who have received child trust fund vouchers have yet to invest them, and some have only two days left to act.
All children born since September 1, 2002 qualify for a CTF — the government’s saving scheme for children.
Eligible children receive a voucher worth at least £250 soon after they are born. Those from families earning less than £13,910 a year get £500.
Children will receive another voucher on their seventh birthday, and the government is considering giving them another voucher at age 11.
Parents and other family members or friends can pay an additional £1,200 a year into their child’s fund, on which any gains or dividends will be tax-free.
Although children born since September 2002 qualify for a CTF, the scheme was not launched until April 2005. The first vouchers were issued on January 17 that year to help clear the backlog. The vouchers are valid for 12 months, so the first receipients do not have long before their vouchers expire.
If they do not invest the voucher within 12 months, the government will invest it on their behalf.
It will be put into a stakeholder CTF from one of 11 providers. Revenue & Customs will allocate vouchers on a rota basis, irrespective of performance. There are 30 CTF providers but 19 will not take Revenue allocated accounts.
Stakeholder CTFs initially invest in equities, but must have a “lifestyling” element. That means that, when your child reaches the age of 13, the money is moved gradually out of equities into lower-risk investments, such as cash and bonds.
Stakeholder accounts have also been designed to be low-cost: there is no initial charge and the annual fee is capped at 1.5% of their value.
Not all stakeholder products are the same. Most are UK tracker funds. Abbey’s is a global tracker and others are actively managed investments.
HSBC’s stakeholder product invests in the bank’s UK Growth and Income fund. Family Investment’s stakeholder product is a global portfolio run by five New Star managers.
There are also different types of CTF — you do not have to invest in a stakeholder account. You have two other options: savings accounts, which are like standard cash deposit accounts, and non-stakeholder CTFs. Not every provider offers all three types of product and there are variations in what you can hold in a non-stakeholder product.
F&C offers parents wanting to invest in a non-stakeholder scheme a choice of 14 of its investment trusts, including the flagship F&C Investment Trust and the Pacific Assets Trust.
Alternatively, if you invest through a stockbroker such as The Share Centre, Killik & Co or Reyker Securities, you could hold any fund or share within your child’s CTF.
With this wide range of choice, advisers are urging parents to make the decision about which type of account they would like for their child rather than leaving it to the government’s random allocation process.
David White at The Children’s Mutual said: “I strongly believe that parents should be actively involved in making the choice about where their son or daughter’s CTF voucher is invested. It is a decision that will affect their child’s future.”
About 2m CTF vouchers have been sent out in the past year, but only about 1.1m have so far been invested.
Rose Fletcher, pictured with her two sons Charlie, three, and Alfie, 16 months, is one of the thousands of parents who have yet to invest their child’s voucher. Fletcher, 29, a full-time mother and housewife from Beckenham in Kent, said: “We received a letter from the government reminding us of the deadline on Alfie’s voucher and I thought, ‘Oh God, that’s on the pile of things to do.’
“The voucher runs out at the beginning of February, but we are definitely going to invest it before then because we want to have the choice about where the money is put. We shall go for an equity-based investment because we feel that will deliver the best returns.”
Over the past 18 years, equities have outperformed cash and bonds. Shares have returned 539%, while bonds have risen by 397% and cash 271%.
Most advisers recommend that you opt for an equity-based CTF, and the fact that Revenue-allocated accounts will be put into stakeholder products indicates that the government also believes equities are the best option over such a long time. But which type of CTF account should you go for? Anna Bowes at Chase de Vere, an adviser, said: “We don’t know whether going into a stakeholder index tracker will be better than choosing a managed fund. In theory, you should get better returns from a managed fund because tracker funds can only ever follow an index — they can’t beat it.
“But whether or not an active fund outperforms its benchmark depends on the manager. If you go for the non-stakeholder option you will have to keep an eye on how the fund is doing.”
The good news is that if you are disappointed with the performance of the initial CTF you choose, you can switch. If you pick a non-stakeholder account, the charges are likely to be higher. If you invest in The Children’s Mutual non-stakeholder account you can choose from a range of funds. But you will have to pay the full initial charge levied on each scheme, typically about 5%, and annual fees of about 1.5%.
The Share Centre has negotiated discounts on a few funds. For example, if you want a global fund for your child, you would only have to pay an initial charge of 0.25% to invest in the Jupiter Global Managed scheme, rather than paying the normal 5.25%.
Many parents are choosing not to make extra contributions to their child’s fund. Bowes said: “The money in a CTF becomes the child’s when he or she reaches 18. If parents invest the extra £1,200 a year, the value of the fund could be worth as much as £40,000 by the time it matures.
“A lot of parents are investing extra for their children’s future but they are not putting the money into the CTF. That way they can retain control of it and can decide when and how they are going to give it to their son or daughter.”
The majority of CTF vouchers being invested by parents not consulting an independent financial adviser are going into stakeholder schemes. Most of those seeking advice are opting for non-stakeholder accounts.
Guy Knight at The Share Centre said: “Our clients are going for the non-stakeholder option. Only about 20% of the vouchers invested through us have been put into our stakeholder scheme.”
Caroline Worswick at Plan Invest, an adviser, said it was recommending non-stakeholder accounts for most clients. She said: “We are using the Children’s Mutual because of the range of funds it offers in its non-stakeholder CTF. The main fund we recommend is Invesco Perpetual Income. It has produced solid returns and we think consistency is important when investing for children.”
Some parents opt for more aggressive funds with exposure to emerging markets and other risky areas or sectors. Malcolm Cuthbert at Killik & Co said that a lot of its clients were going for higher-risk funds for their CTF. The main reason was that they were hoping for superior returns, relying on the length of time to iron out what could be a highly volatile ride. Such a strategy will not suit everyone.
Some doubt whether equities are the best place for CTF vouchers. Philippa Gee at Torquil Clark, an adviser, said: “I feel that CTFs should stay in cash. If you have children you will need to save for university fees, so the money you put away for this can go into equities.
“But you should be looking for diversification to spread the risk and should have money in cash and bonds as well. I would use a CTF as the cash element of a bigger portfolio.”
Yorkshire building society’s account pays 6%, including a 0.7% bonus for 12 months.
