The Government has announced three quarters of parents open a child trust fund (CTF) for their kids within the first year of their birth.

Yet that sill leaves hundreds of thousands failing to decide the destiny of cash payouts from the state.

Westminster says this highlights the success of the scheme as 4.6 million children have around £2bn saved in these accounts (see the Child Trust Fund guide).

It adds that family and friends contributed an average £289 per child during the year to April on top of the £250 or £500 the Government pays into every newborn's CTF, and again when they're seven.

However, while the initial cash injection is great, there are warnings it could be dangerous paying any extra into a CTF.

At 18, whatever is in the fund becomes available to the child with the returns being tax-free but the worry is it could be spent on booze rather than invested wisely.

The Tories have said they will end CTF payments to most children from families who earn over £16,040 a year if they get into power.

Martin Lewis, creator, says: "Even with the free money, one quarter of parents do not bother to open an account.

"The problem is people, after getting the cash, are encouraged to save for their child's college fund. And no-one knows when looking at their little baby what type of 18-year-old they will be.

"It's much better to put any cash aside for your kids in the best cash ISA, if you've room, as then you get it tax free and keep control over it until the time is right. (See the Top Cash ISAs guide)."

The three quarters of parents who open an account control where that cash is placed, meaning they can plump for a safe haven or gamble it on the stock market.

If you do nothing within a year, the Government decides the type of account which may not be of your liking.

Exchequer secretary to the Treasury, Sarah McCarthy-Fry MP has written to all MPs asking them to promote CTFs amongst parents.

She adds: "The CTF is now the key means to support the next generation of savers."

David White, chief executive of The Children's Mutual, says: "Through the CTF, in future, all 18-year-olds will have the opportunity to start adult life with an asset and this should have a major impact on their lives and the wider economy."

Further reading/key links

Get the best rate for your child's savings: Child Trust Funds
See what you're entitled to: Five-Minute Benefit Check
Claim free childcare cash: Tax Credits

On Our Forums

CTF warning