Child Trust Funds

All babies born since September 2002 get £250 of free money from the government to save in a Child Trust Fund (CTF). A second voucher's sent out when the child hits their seventh birthday, and you're able to switch to a new top paying rate at any time, just like normal savings, so find the very best place to stash the cash.

Mummy, I can count to £250!

•  What is a CTF?
•  How do they work?
•  Can money be added?
•  Choosing the right CTF
•  Best Buy: The top savings CTF
•  Investment CTFs
•  Related Articles/Discuss

What is a Child Trust Fund?

Child Trust Fund's (CTFs) are the accounts specially set up to house the free cash vouchers given out by the government since April 2005, for all children born since 1 September 2002. Once put into a CTF, money is locked away until the holder's 18^th birthday, when they'll get a lump sum that can be spent how they wish.

Households with total annual incomes above £16,040 (in 2008/09) get a £250 voucher per eligible child, and those earning less get £500. The scheme started in April 2005, so any kids born between September 2002 and then should have received a backdated 'interest payment' too.

At the age of seven, each child will receive a further £250 or £500 voucher, again dependent on income. These second payments started in September 2009; so if you've got kids, keep your eyes peeled for the second voucher following their 7th birthday party.

Once you have a voucher, you get to pick which CTF account to put it into. This article helps you pick the best, but crucially...

If you don't use your voucher within a year, the government chooses an account for you, potentially earning a rubbish return!

This will mean you miss out on interest for the year that you dawdled, plus could be earning low interest once the government's made its pick.

While you're deciding which CTF you ultimately want, at the very least put the voucher in the best savings-type account (see below). This means you're earning interest and can switch when you make a decision later.

What if I've lost my voucher?

If you can't find your voucher you can get a replacement from the Inland Revenue's Child Trust Fund helpline.

Give it a call on 0845 302 1470, and vouchers can be reissued without charge.

How do they work?

Parents of qualifying children should receive a voucher and information pack after applying for child benefit. Those with new babies should receive them soon after the birth (congrats by the way!).

The choice and ongoing control of the investment belongs with the person who has parental responsibility and opens the CTF account, and passes to the child itself at the age of 16.

As CTFs are complex, and raise many questions, we've written a full guide going through all the details. This is something the web isn't suited for, so there's now a full 14 page downloadable PDF guide which explains how CTFs work, what to watch out for and whether you should go for a cash or shares account.

This was written in 2005 when CTFs were first launched. The basics are all still correct, though a few of the numbers relate to the 2005 figures. For updated best buys, this article is still the place to look.

Click on the link below to download the guide. If you don't already have it, to view PDFs you need to download a free copy of Adobe Acrobat Reader

It is OUR money, not theirs'

I keep checking while writing this to stop myself referring to the trust fund as the ‘Government's money'. Of course it isn't. It's our money, the Government is just the custodian.

This is redistribution of tax revenue into the pockets of those with children. This doesn't mean I don't approve, just remember whose cash they're spending. They're not the generous ones, we are.

Can I add money to the Government's contribution?

Yes. The Government's money is intended as just a bonus; the real aim behind CTFs is to encourage parents to save for their childrens' future, especially their university education.

Parents, family and friends or anyone else can add a total of up to £1,200 a ‘year' to the Government contribution.. with the year starting on the child's birthday.

All savings put into CTFs are free from both income and capital gains tax although, technically, Inheritance Tax rules do apply. However, unless it's large gifts from grandparents this is likely to be irrelevant (read the Inheritance Tax guide for more details).

Is it worth adding your own money?

On the surface this is a tax-efficient scheme, so it's a good idea. Yet it has two major drawbacks.

• The money goes direct to your child.
  
  Babes in arms now can grow to be rebellious 18 year olds. The CTF goes straight to them. Your savings for their college fund may be spent in a day on a Playstation, world trip or some darker purpose. It is their money, you can't stop them. Do consider whether you want your child at 18 to have complete autonomy over all this.

• This is political.
  
  This scheme comes from a political agenda and opinions change. It's unlikely any party would be brave enough to reclaim the cash, but the rules and regulations could morph over 18 years.

The CTF is a useful place to stash some cash, but it's probably best not to dunk it all in there.

No. It stays until your son or daughter reaches 18. The only exception is an unpleasant thought. If a child dies before 18, the money automatically goes to the parents or guardian. Provisions are also possible to release the money early for terminally ill children.

Choosing the right CTF type

When deciding what to do with that CTF voucher, you have two avenues of possibility:

• Savings-type CTFs.
  
  Use a simple savings child trust fund and it works exactly like a normal savings account. You're guaranteed to get back the money that you put in, plus interest on top. For info on how interest rates work, read the full Interest Rates guide.
  
  
• Investment-type CTFs.
  
  Investing means risking money in a stockmarket linked product in the hope of better returns, but the possibility you won't get back what you started with. By plumping for either a 'stakeholder' or 'shares' -type CTF, you are taking a risk that you could lose the free cash.
  
  

This means the main question to ask yourself is...

Do you want to save or to invest for your child's future?

You can only choose a CTF of one type (though you could use non-CTF money in another product to balance the risk). Conventional wisdom argues that over most 18 year periods stockmarkets outperform savings accounts, as there's time for market vagaries to cancel each other out. Yet it's still not risk-free. Just ask anyone who suffered abysmally-performing pension or endowment funds.

There is no right answer. The choice is down to your priorities; are you willing to risk this money shrinking in order to chance it growing more quickly? If you didn't choose by April 2006 the Government will have opened a shares account for you, though you can transfer out of this.

The Top CTF Savings Accounts

There are only limited providers to choose from as most banks consider these big work for little reward. The top picks tend to be smaller building societies; as such it's always worth checking your local ones for higher-paying branch only offers.

Once you've decided to plump for a savings-type account, the choice of which one is simply a case of ‘who pays ths most?'. The only trick to watch for is ‘bonus rates'; short term introductory interest hikes to draw people in.

These can be useful, particularly in a low-rate environment, but always mark in your diary when it ends, then ditch & switch at that point (use the Tart Alert to help).

The Top Payers

• Top Rate: Yorkshire BS, 3% AER
  Inc. year-long bonus of 0.7%
  
  The top pick is Yorkshire Building Society's paying 3% AER, with 0.7% of that being a bonus that lasts for 12 months. You can apply in branch or by phone (call 0845 1200 100), then the account must be operated by post or in branches.
  
  
• Top Clean Rate: Skipton BS, 2.65% AER
  Totally clean, no bonuses
  
  The Child Trust Fund from Skipton BS pays 2.65% AER and is totally 'clean' ie. there's no bonus which drops after an intro period. So if you don't want to worry about ditching and switching (though you should still check your rate regularly), this is a good bet.
  
  Again, you can apply by phone or in branches, and the operate it via post.
  

Investment CTFs

If you're happy with the element of risk, there's a further choice to make when it comes to investment-type CTFs. They come into two broad flavours:

• Stakeholder Account.
  
  These have strict operational limits, including a maximum charge it can lop off your investment each year of 1.5%. The good news though is that you can't be charged a penalty for transferring the investment.

• Shares Account.
  
  These are more flexible plans that allow for a wider choice of investments. However on the flip side, the charges can be higher and less transparent than their stakeholder cousins.

Now, let us be straight here; investments aren't this site's expertise. We write about ‘the best way to buy investments', but not about ‘what to invest in'.

One option is to seek an Independent Financial Advisor's help, though this will cost (c. £75 - £250 per hour), so you need to be sure it's worth it. We've a guide to finding IFAs, picking the right one and what you may need help for (read Financial Advice guide).

Do remember though, IFAs are only guessing too; by the nature of investment they can and do get it wrong. This is an attempt to predict the future so there's no guarantee their guess will be any better than your own. No one knows the ‘right answer'.

If you can, examine the investment options yourself, making sure the charges aren't too high. Different funds have different levels of risks associated with them. After all, putting your cash in a fund tracking a wide range of large UK companies, is likely to be less risky (meaning not as high possible growth, not as high possible loss) than one specialising in Indian small technology companies.

Can I switch between savings & investment CTFs?

You can transfer your account both to another provider, and to another investment type, e.g. you can move from savings to stakeholder at any time. There will be no transfer penalties for doing so, though shares type providers may charge dealing costs and stamp duty when you close them.

To transfer simply sign up with the new provider; it'll inform the old one for you, and the Government in case it makes any further payments. Ask the new provider to move the money for you and inform the old provider it is being moved. You can't split the CTF if you transfer it though – you must transfer it whole.