Child trust funds Types of child trust fund
Note: Government contributions to child trust funds have now ended, and it is no longer possible to open a new child trust fund. If your child already has a CTF contributions to this can continue, and you'll be able to switch CTFs in order to ensure your son or daughter gets the best deal on their savings. Current alternatives to CTFs include children's savings accounts and Junior Isas.
Child trust fund options
There are three main types of CTF account to choose from, offered by a range of providers including banks, building societies and friendly societies. Within these three categories are numerous financial products including straightforward cash-based savings accounts, or share-based accounts for those who fancy a flutter on the stock market.
Cash child trust funds
A cash CTF acts just like a savings account, except that the interest is tax-free.
A cash CTF 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. If you choose this option, check rates regularly and switch if necessary.
Stakeholder child trust funds
Stakeholder accounts are riskier than straight-foward 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. Investment based accounts are riskier but could generate healthy returns.
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 in some cases is more expensive than share-based accounts). If you want to invest your CTF into stocks and shares, you might find lower charges and a higher potential growth with non-stakeholder share-based accounts.
Share-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 CTF 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 share-based CTF makes will have to cover the charges imposed before you start to make a profit. Shop around for a good deal to make the money work a lot harder for you