Child Trust Funds

The Child Trust Fund CTF is a long-term savings and investment account for children. The Government claims to have introduced Child Trust Funds to ensure your child has savings at the age of 18; to help your child get into the habit of saving; to teach your child about the benefits of saving; and to help your child understand personal finance.

What is the Child Trust Fund CTF?

Chancellor Gordon Brown first unveiled his proposal for a Child Trust Fund CTF in the April 2003 budget and they have been operating since April 2005.

It is a tax-free savingsinvestment vehicle for children born on or after 1st September 2002. Your child is eligible if Child Benefit has been awarded for them and they are living in the UK.

The government makes a starting payment into the CTF and another payment on your childs seventh birthday. Parents family and friends may contribute up to a total of £1200 a year into the account.

In November 2004 the Child Benefit Office began sending out letters to all claimants of Child Benefit about seven million parents to make them aware of the new accounts. You can check out what the government has to say about CTFs by taking a look at HM Revenue & Customs HMRC child trust fund website

How much will the government contribute?

The government will kick-start your sprogs Child Trust Fund CTF with a voucher worth at least £250. Poorer parents will get more. If your family income is below the Child Tax Credit income limit 15575 for 2008-09 the value of the voucher you receive will be doubled to £500.

Children born between 1 September 2002 and 5 April 2005 received a starting voucher for slightly more than £250 in recognition of the fact that CTF accounts were only available from April 2005.

The Government will make a further contribution when the child reaches seven - all eligible children will receive a further payment of £250 into their CTF account at this age with children in lower income families receiving an additional £250.

You can't spend the voucher. It isn't your money. You must invest it in a CTF in your childs name. The voucher will be sent to the Child Benefit Claimant.

What do I do with the CTF voucher?

The voucher should be used by a person with parental responsibility to open a Child Trust Fund CTF account in your childs name with the provider of your choice. The voucher will come with a full information pack explaining what you need to do.

If the voucher has not been invested after 12 months HMRC will invest it for you in a default stakeholder fund in the childs name. The stakeholder CTF account works by investing your childs money in shares to take advantage of the potential for higher growth that this kind of investment offers. Once your child turns 13 money in the account starts to be moved to lower risk investments or assets such as cash.

What sort of CTF account can I open?

The voucher cannot be used to open an ordinary bank account for your child. It must be used to open a Child Trust Fund CTF account. However there is a range of different CTF accounts. Like Individual Savings Accounts ISAs CTF savings may be invested in investment funds holding shares or bonds or held in basic deposit accounts or invested in accounts that qualify as stakeholder CTF accounts.

The charges that may be levied on a stakeholder CTF account are being kept low - having been capped by the government at 1.5 a year - the account will accept minimum contributions of £10 and is designed to offer good returns over 18 years by investing in the stock market but these returns are not guaranteed and the capital invested is also liable to go up and down in value.

Risks are spread across a range of investments and the investment is moved into less risky funds as the child nears the age of 18. With all investments the value can go down as well as up can fluctuate and is not guaranteed. Your child might get back less than was originally invested.

Do I have access to the money in my childs CTF account?

In a word no! Once any money whether from the government from you other members of the family or friends is in a Child Trust Fund CTF the only person who can touch it is your kid and even they wont be able to take it out and get their hands on it until they reach the age of 18.

There is no access to the money in the CTF until your child is 18. The account and the funds contained in it are your childs property although it is managed by a person with parental responsibility until the child reaches the age of 16. Thereafter children will manage their own CTF accounts.

When your child turns 18 they will be able to withdraw the money and at that point he or she is entirely responsible for what happens to it. You have no parental control over when the money is released or how it is spent.

The government is expecting financial education to play a key role in the CTF and says that all children will receive education to help them manage their money in the future.

Will the CTF have any impact on my tax and benefits?

There is no tax liability involved with a Child Trust Fund CTF and any CTF savings will not be taken into account in any claims for benefit for the family. Money saved in a CTF is free of both income tax and capital gains tax as far as your child is concerned.

There has been criticism that this means a CTF offers no real advantage over ordinary savings accounts because most children are non-taxpayers anyway. But this is not quite the whole story.

If you put money into an ordinary kids account and the interest earned goes over £100 a year the taxman treats it as your money and not your childs - that means you would get taxed on it. That's not the case with a CTF.

As a parent if you can afford to you can whack in the whole £1200 a year yourself without any tax liability ever being created. For the more "well-heeled" among us it could be a handy way of sheltering some funds from the taxman while keeping the money for the benefit of your children.

Can I roll-over one years contribution limit to the next?

There is no restriction on where the contributions to your offsprings Child Trust Fund CTF come from - anyone may contribute up to the maximum annual contributions limit of £1200.

However if you dont reach that limit you may not pay more in the following year. The limit is set to run for each year separately and may not be used on a cumulative basis. Thus if you dont contribute anything for any given year the contributions limit for the next year is still only £1200.

Each "year" for the purposes of your childs CTF runs from his or her birthday one year until the day before the following birthday the next year.

How much is my childs CTF likely to be worth?

Thanks to compound interest the child trust fund should grow substantially over time. Virgin Money calculates that if parents top up the fund by just £10 a month the amount saved by the time your child turns 18 assuming 7 growth a year would be £5210 - compared to £1410 if just the basic £500 were left in the fund.

However thats not going to go far against a potential bill for university education that has already been forecast to rise to more than £30000 over the next six years according to Barclays. You should also bear in mind the likely impact of inflation over the course of the coming years.

What will make your kids Child Trust Fund CTF worthwhile is not what the government puts in which after all is just some of our tax money being given back to us but what you put in.

Figures from Fidelity Investments suggest that at 6 a year a child born in September 2002 would receive a pot of £11355 at 18 if you put in slightly over £20 a month on top of the voucher handouts. However make the maximum possible payments into the CTF and your kid could be looking at a fund of £45458. These figures are illustrative only. There is no certainty of 6 per annum growth being achieved.

What can I do if my child is not eligible for a CTF?

If your child was born on or before 31 August 2002 he or she will not be eligible for the Child Trust Fund CTF. You will not receive the voucher payment from the government and you may not open a CTF account for your child.

However you can still make savings and investments on your childs behalf and there is a range of options open to you - see our guide

2009-03-09 16:31:42 © Moneyextra.com