Unopened baby gifts going to waste

It's always great to receive a cheque for a birthday or Christmas and the first thing you normally do is take it to the bank. So it seems strange than more than one million parents, who have received a £250 gift for their child from the government under the Child Trust Fund scheme, are simply letting it sit on the mantelpiece gathering dust rather than putting it to good use in a savings account.

As well as the value of the gift for children born from September 2002 onwards, which can't be touched until the child reaches 18 years, it entitles the parent to open a tax-free Child Trust Fund account on behalf of their child. Parents, grandparents and friends are also allowed to invest capital up to a maximum of £1,200 a year. And at age seven the government will put another £250 into the account.

Since January this year, the government has sent out 1.74 million of the £250 vouchers yet only about half a million have been used meaning that around two thirds of parents still have to make an investment decision. While the special Child Trust Fund accounts have been available only since 6 April, the vouchers were sent out to eligible parents in January and February giving them plenty of time to look at the investment options. Despite this, take up has been low at only 30%.

It's a big decision for a small person...

But perhaps, this is not surprising because deciding how to invest the money is complicated and has long-term consequences. All Child Trust Fund account providers have to be approved by the Inland Revenue and you have three basic choices a cash deposit account, an equity-based investment fund or the stakeholder account. Cash-based accounts are available from a number of banks and building societies and the equity and stakeholder accounts are being sold by friendly societies, insurance companies and investment fund managers.

The Investment Management Association (IMA) says that where you invest depends on your attitude to risk. If you're risk adverse, the cash option is the safest. However, over the longer term the stock market usually outperforms cash and the other disadvantage is that inflation, although low at the moment, could increase and erode the value of your child's fund. But unlike equity-based accounts, cash-based ones have no charges.

Currently there are a number of cash-based Child Trust Fund accounts paying 6%, such as, Nationwide, Britannia and Ipswich building societies. By saving the maximum of £1,200 a year, Nationwide says that its Child Trust Fund account would provide £40,025.57 after 18 years, substantially more than its ordinary children's savings account, which pays 5.01%, and would be worth £33,341.35 at the end of the term.

The stakeholder is the government's preferred investment vehicle for Child Trust Funds0. Its equity based with management charges fixed at 1.5% a year and once the child reaches age 13 the funds are switched to lower risk funds.

Even though the government's contribution to your child's future is a small amount, it's a long-term investment and there is nothing to stop you getting advice from an independent financial adviser before making a decision that could have significant impact on your child's future. Remember that if you do nothing the government will take charge after a year and open a stakeholder account for your youngster, which may not be the best option for you. You child will also lose out on a year's return on investment whether in a cash-based account or equity-based account.

08 June 2005 © Moneyextra.com

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