Child trust funds explained Child trust fund accounts
Changes to child trust funds from January 2011
From 1 January 2011, all government contributions to child trust funds have been stopped, and babies born on or after this date will be ineligible to open child trust funds.
Parents with children who already hold child trust fund accounts will still be able to contribute money to these (up to the maximum annual limit), and it will still be possible to shift your child's funds from one CTF account to another should you wish to do so.
There are other ways you can start putting money aside for your child if you are unable to contribute to a child trust fund. Read the article Seven smart ways to save for children for top tips and advice on getting started.
Cash child trust funds
A cash child trust fund (CTF) is very similar to a cash Isa, whereby the interest on the savings is tax-free.
This is the safest and simplest option, especially if you're uncomfortable with the idea of investing your child's money in the stock market. But the money may not grow as much as if it was invested in shares. However, everything depends on the current economic climate, as a Which? survey from spring 2009 found that cash CTF accounts had outperformed all other types over the life-time of the scheme.
But if you choose this option, check rates regularly and switch if necessary.
Stakeholder child trust funds
Stakeholder accounts are riskier than straight-forward cash accounts, but the cost is lower and risk less pronounced than with share-based accounts.
Although stakeholder CTFs do invest in shares, they have to meet certain conditions regarding the type of investments allowed and must hold a spread of investments across different markets, sectors and securities.
Also, when your child turns 13 the fund is 'lifestyled' which means it's gradually transferred to less risky investments such as government bonds.
Most stakeholder CTFs charge the maximum annual management charge they are allowed to do which is 1.5% (which is some cases is more expensive than share-based accounts).
If you want to invest your child trust fund into stocks and shares, you might find lower charges and a higher potential growth with non-stakeholder share-based accounts.
Shares-based child trust funds
Shares-based child trust fund accounts are worth considering only if you're willing to take a risk with your child's fund.
There are two types of share-based account. The first offers you access to a limited range of investment funds; you put your money into one or several of the funds on offer, switching between them whenever you like (although you may be charged for this).
The second type works on a 'self-select' basis, which essentially means you can choose from almost any fund you like from a huge range of providers and buy shares directly too, all within the child trust fund wrapper. The charges for these accounts vary enormously depending on what you go for and how frequently you move money around.
Historically, investing in shares has usually provided a better return over the long term than savings accounts. However, it's a riskier option as the share value could go down. It's also more costly than investing in cash as charges have to be made to the account for management.
Remember that any growth your shares-based CTF makes will have to cover the charges imposed before you start to make a profit.