Child Trust Fund - investing in a financial head start for your
child
What is a Child Trust Fund?
A Child Trust Fund (CTF) is a long-term savings and investment
account for a child, designed to build a lump sum for their
eighteenth birthday. Every eligible child in the UK born since 1st
September 2002 receives a Government voucher for £250 to be used to
open a CTF account for them.
Is it really necessary?
Economic cycles are hard to predict and you should always be
thinking of a ‘Plan B’ – the current credit crisis and subsequent
downturn has highlighted this more so than before. And while there
are many different ways to save and invest for the future, the
Child Trust Fund has been especially designed for saving for
children.
Your child will grow up and it is more than likely these days
that they will need a bit of help with university costs, getting
onto the property ladder or even buying their first car. Our
experience is that as parents we want to make sure we are doing
everything we can to help them, and investing even a small amount
in their future now could make a big difference to them at 18.
Child Trust Funds have been created to help smooth this path
into adulthood. The lump sum that your child will receive at 18
could help towards the usual costs involved in starting to make
one’s way in life. From the capital required to start a
business to simply buying the suit needed to attend an interview, a
CTF account is an asset that could help to offer security and
opportunities for your child.
How does it work?
The CTF is essentially a long-term savings and investment
account in the name of your child. The Government issues a £250
voucher when you register for Child Benefit. This voucher is used
to open and kick-start your child’s CTF. The Government will add
another £250 to the account when your child turns seven.
You can register for Child Benefit here if you
haven’t already done so.
For families on lower incomes (less than £14,495 in 2008/9) the
Government adds an extra payment of £250 once the account is open.
They will review the position when the child reaches seven, and
will enhance their CTF contribution at that age by £250 if the
family is then on a qualifying lower income.
Each Child Trust Fund account can then have up to £1200 every
birthday year added in total, not including any government
contributions.
All money paid into a CTF is invested until the child’s 18th
birthday. Only your child can access the money, but not until they
reach 18.
How do I choose which account to open?
Once the CTF voucher is issued, you have a year to use it to
open a CTF account. If you haven’t opened a CTF within a
year, the Government will open a stakeholder account on your
child’s behalf.
There are three types of CTF accounts to choose from.
- ‘Stakeholder’ CTF account
This account is a long term investment linked to shares and is
the governments preferred option. Over 75% of CTF accounts
opened in the UK are stakeholder accounts and with these you can
benefit from a price cap on charges at 1.5%, a flexibility to make
additional payments plus the fact these accounts are designed to
meet your needs during the eighteen year period.
They recognise the need to build in safeguards to address the
financial risks of long-term investment. The solution is to
gradually move the investment from shares to more stable assets –
such as government bonds and cash – starting on the child’s 13th
birthday.
Investment is linked to shares because historically these have
produced better returns over longer investment periods (a CTF
account runs for 18 years). However, past performance is not a
guarantee of future outcomes, and in any shares-based investment,
the eventual payout could be less than has been paid in.
Shares can fall as well as rise in value. While the price
of company shares is low, it is not always a bad thing. You
will be able to buy more shares into your fund meaning that the
account will have a better potential for growth should share prices
start to rise. While the price of company shares is high the value
of the account is increased.
In addition to these benefits, neither you nor your child will
pay any personal tax on investment growth in the account, or on the
lump sum payout to your child at 18.
These accounts mostly invest the child’s money either directly
or indirectly in company shares, but do not have to include any
facility to transfer money into investments with less risk attached
during the later years. So, they offer the possibility of achieving
a greater payout at 18, but you need to weigh this against the
greater risk of losing value if share prices fall, especially near
the end of the savings period.
- Cash deposit (savings) accounts
If you don’t want a shares-based or stakeholder account, you
could choose a savings account for their Child Trust Fund
account.
But you should consider that, although the money earns interest,
the likelihood is that it won’t grow as much as it could if the
investment were linked to shares. Also, the effect of inflation
means that money in the account could lose its real value over the
long term.
Every little helps
Any one can add to your child’s CTF account, yourself, your
baby’s grandparents, godparents, aunties, uncles, brothers and
sisters. The payments can be regular payments by direct debit or
one off payments as gifts e.g. birthdays and Christmas. The
overall maximum that can be paid in between all contributors is
£1,200 a year (birthday to birthday). So, they can all help give
your child a great start. Remember, there’s no personal tax to pay
on any of the investment growth over the lifetime of the CTF, or
when it pays out.
Not only could a Child Trust Fund be a smart way for you to save
on behalf of your child, it is also a great way for you to
encourage them in the good habit of saving – they can pay in their
own money, for example birthday or Christmas gifts. At 18, your
child can use the money from their CTF for any purpose. It could,
for example, be used to help pay for further education, buy a car,
or travel the world. It’s up to them.
The Children's Mutual
If you choose The Children’s Mutual for your child’s CTF, you
can rest assured knowing that your child’s money is in experienced
hands. We have over six hundred thousand Child Trust Funds under
management, and more than 128 years of experience in helping people
provide for their families including working closely with the
Government to develop the ‘Stakeholder’ type of CTF account.
David White, Chief Executive of The Children’s Mutual said:
“The CTF has been developed to help foster a culture of saving
amongst children and adults, and to help youngsters start out in
adult life with a financial asset”.
“Some parents of today’s 18-year-olds are in a very
difficult financial position. They have to decide how they are
going to plan successfully for their own futures whilst helping
their children meet the financially draining challenges of home
ownership, higher education or starting a business.”
In fact, The Children’s Mutual is the only company that
specialises in savings for children and during the last quarter was
the choice of one in four parents actively opening their child's
Child Trust Fund – either directly or through partners including
Boots, Bounty, ASDA, Lloyds TSB, Co-op and Mothercare.
Is it worth it?
The average amount parents save for their children in our CTF
accounts is currently £24 a month. Paying this amount for 18 years
could produce a lump sum of over £9,500 for a child at age 18.
And the numbers become even bigger when other family members pay
in too. If both sets of grandparents can match the parents’ £24 a
month (that’s £72 a month altogether), the fund could grow to
around £27,000 after 18 years. Paying the maximum £100 a month
could mean a very healthy £37,000 when the child is 18.
These figures are based on money being paid into one of our
Stakeholder Child Trust Fund accounts, with charges of 1.5% of the
account’s value each year. We’re assuming the account grows at 7% a
year. Do remember that the value of our accounts go up and down, so
a child could get back more or less than this. The figures also
include the Government’s initial £250 voucher and an extra £250 at
age 7.
David White said: “It is estimated that by the time the
first generation of CTF holders turn 18 in 2020, covering the cost
of higher education will be in the region of
£63,0001 for a three year course, and buying a
first home will require a deposit of a minimum of
£27,3002. These are not small amounts of money. CTFs
offer parents a vehicle to help their children financially without
putting themselves under more financial pressure in the
process.”
“In the past there has been a fear that a typical 18
year-old receiving a great wad of cash will just blow the lot. But
our research tells a very different story indeed; in recent
research, 57% of youngsters asked what they would do if they were
to receive £20,0003 at 18 were most likely to save it,
with spending on education or putting it towards their first house
their second and third choices4.”
Child Trust Fund Calculator
Our Child Trust Fund calculator aims to help you find out how
much you might choose to pay into your child's Child Trust Fund
account each month over an 18 year period.
Try our Child Trust Fund calculator here.
[1] www.thechildrensmutual.co.uk/ctfcalculator
Based on the National Union of Students estimated average
expenditure for the academic year 2007/2008 of £13,140 including
tuition fees of £3,070 for the first year www.direct.gov.uk.
Education and Learning quote the maximum amount for tuition fees in
year 2 for the academic year 2008/2009 as £3,145. The
predicted amount for tuition fees in year 3 academic year for
2009/2010 assumes an increase in fees at the same level and is
estimated at £3,225. This amount applies to students resident in
England and Wales who are studying outside London. Welsh
students may be eligible for a grant
[2] www.thechildrensmutual.co.uk/ctfcalculator
Assuming deposit at 10% of average first time buyer's home cost of
£175,093. Halifax (December 07; sourced: February 08)
[3] £20,000 could be achieved if the account was topped up by
around £53 a month from birth. This projection is based on
money being invested for 18 years in a stakeholder Child Trust Fund
account, alongside the Government’s initial £250 voucher and
another £250 Government contribution at age 7, with yearly growth
of 1.5% of the account’s value each year. These figures are
not guaranteed, share values can go down as well as up and the
eventual lump sum could be more or less than indicated.
[4] Commissioned by The Children’s Mutual, The Coming of Wage
Report was compiled by the Social Issues Research Centre. It
is based on a mix of qualitative and quantitative research.
Qualitative research included interviews and focus groups with
young people and parents. The quantitative research included
a YouGov poll with 1000 parents and a poll amongst 11 to
18-year-olds conducted by specialist agency Dubit.