Feature: Put your trust in the future
Kate O’Raghallaigh takes a look at how the Government is encouraging parents to save for their children
Since April 2005, the Government has encouraged parents to put away money for their children by introducing the Child Trust Fund (CTF), a long-term savings account designed to enable children to have some money behind them once they turn 18.
Every child born on or after 1 September 2002 who is in receipt of Child Benefit is eligible for a £250 voucher from the Government, which the child’s parent or legal guardian can use to open a CTF account. A further £250 is donated by the Government on the child’s seventh birthday, with an additional £250 given to children of low-income families. Neil Breton, spokesperson for Engage Mutual Assurance, says: “CTFs are designed to provide savings for the next generation. Our studies show that over half of parents have been more encouraged to save for their children since the introduction of CTFs.”
CTFs are similar to ISAs, in that there are two basic kinds of accounts to choose from – cash savings or stocks and shares. Parents can choose their account from a number of providers, and can invest a maximum of £1,200 per year, tax free. Anyone can deposit money into the account, but no withdrawals can be made until the child turns 18 years old. If the parent or guardian doesn’t use the voucher to open an account within 12 months of receiving it, the Government opens one on behalf of the child, so the voucher is invested anyway and contributions can be made as normal until the child turns 18 years old.
But what kind of CTF should you go for? “Stock market CTFs tend to outperform cash,” says Breton. But if you decide to go with stocks and shares there are further choices to be made. He continues: “With a Stakeholder CTF, the account provider invests the savings in an investment fund until the child turns 13 years of age, after which they move the money into safer, less risky assets. The account charges a management fee which cannot go above 1.5%. It’s basically a way of investing in the stock market with reduced risk,” he says.
Too much choice?
However, according to Scottish Friendly, the take-up rate of CTFs is actually decreasing, with an estimated 30% of new parents not opening a CTF themselves. Neil Lovatt, spokesperson for Scottish Friendly, says this is because people are often confused by the options presented to them. He explains: “The Government puts too many choices in front of new parents. When new parents get their CTF information pack sent to them and the requirements – whether to choose a cash, stakeholder or non-stakeholder, as well as finding a provider – are put in front of them, they simply get confused.”
Stakeholder CTFs are the accounts parents should be looking at, Lovatt says. He continues: “Around 18% of parents are opening cash CTFs, without realising what they are losing out on. Cash accounts are viewed as a safe, default option, but when you consider that no access to the money is allowed for 18 years, there really is no benefit from having the money in cash. I believe that cash CTFs should be confined to the back of the promotional pack as a long-term investment.”
According to recent figures from Moneyfacts, stakeholder accounts performed at a loss over the past year, with some returning -11.34%. Michelle Slade, analyst at Moneyfacts, says this shouldn’t put people off these kinds of accounts. She explains: “Last year, the performance of stakeholder funds was negative but this is a result of the poor performing stock market and the ongoing credit crunch. CTFs are long-term investments and investment versions are expected to outperform savings versions in the long run.”
If, by the end of the year, you haven’t used up the £1,200 allowance, you cannot roll over the remainder to the next year, so it’s a good idea to invest as often as you can, even if it’s only a small amount each month. According to Scottish Friendly, putting off investing in a CTF, even for a year, can have costly consequences. For example, if a parent chose invest their CTF in the FTSE 100, they would lose out on £611 if they invested £20 per month for 17 years, having missed the contributions for the first year of their child’s life. Furthermore, someone who invests £100 per month in the same account, also not contributing for the first year, would lose out on a sizeable £2,977. Both examples are based on an annual growth rate of 7%, minus a 1.5% annual management fee.
When it comes to events in your child’s life, such as going to university, buying a car or getting on the property ladder, it is not entirely unlikely that you, as a parent, will need to provide some kind of financial support. University, cars and houses certainly don’t come cheap, and if you have taken the initiative to regularly invest for your child’s future, you can rest assured that although you may not have a money tree at your disposal once your child comes of age, you will have something to contribute.