The first recipients of the Child Trust Fund scheme, which is designed to provide savings for adulthood, are now receiving their second payment. Children receive a voucher worth £250 shortly after they are born, which must be put in to a Child Trust Fund account. Then, on their seventh birthday, the Government will put an extra £250 straight in to their account.
This £500 is a great start, but the account doesn't have to stop there. Family and friends can all contribute to the account, up to a total maximum of £1,200 each subscription year, which runs between your child's birthdays. The final amount, which is currently tax-free (although it's worth remembering that tax advantages depend on individual circumstances and the tax treatment of the Child Trust Fund may change in future), is then available to your child on their 18th birthday and it's up to them how they spend it - it could contribute towards university fees, driving lessons, a once-in-a-lifetime travel experience or a deposit on their first home.
There are three types of Child Trust Fund that you can invest in. The first is a non-Stakeholder cash account. The money you put in will earn interest each year, and will be safe. Even if you don't add any additional money to the £500 Government contributions, the fund could still be worth around £820* by the time it matures.
Option two is a non-Stakeholder share-based account. These accounts invest in stocks and shares and give you greater control over how your child's account is invested. But as with all share-based investments, there is a risk that the value of the account could go down as well as up, and your child could get back less than was invested.
The third option is to invest the money in a Stakeholder account. Like the non-Stakeholder share-based account, it is linked to the performance of shares. The Government has set rules for this kind of account, such as capping the annual management fee at 1.5%, and from your child's 13th birthday the fund's managers will switch to lower-risk investments, such as fixed interest and cash. Like option two, though, there is the risk that this type of investment can go down in value as well as up, and your child may get back less than the amount paid in.
If you really want to give your child the best chance in life, then adding to the Child Trust Fund yourself can really make a difference. For example, by paying an additional £25 a month in to a Stakeholder account, a child born on the 1st of January 2009 could, according to the Government trust fund calculator, have an estimated pot of £9,040** This figure assumes an average growth rate of 7%, but of course there can be no guarantees that the stock market will achieve this.
If you double the monthly contribution to £50 a month, then a stakeholder child trust fund could be worth an estimated £17,060**, and a cash account £14,880* (assuming a 3.50% interest rate).
And if you pay in the maximum £1,200 a year - which is only slightly more than you receive in child benefit of £1,040 per year for the first child - the cash account value almost doubles to £28,940* with the investment option increasing to £33,110**, all according to projections from the Government trust fund calculator.
Even though inflation will reduce the actual value of this fund, this is still a significant amount - university fees currently run at a maximum of £3,225*** per year, and you should at least double this sum to include accommodation, socialising and the like. And even if your child decides against continuing education, then the amount they receive from their Child Trust Fund could be used towards a deposit on a home.
If your child's fund is about to receive its second payment and you haven't started to contribute to their CTF, fear not - you still have plenty of time to make an impact. By starting to pay in £25 a month now, a cash account for a child born on the 1st of September 2002 could be worth around £4,310* by the time your pride and joy hits 18. In a Stakeholder account for a child born on the same day, the sum could be £4,620**. Pay in the maximum £100 a month from now on and a Stakeholder fund may total £17,220**, or £16,140* with a cash savings account. It's not too late!
* Projection figures derived from the Government Child Trust Fund Calculator. Cash account projections assume a 3.50% interest rate.
** Projection figures derived from the Government Child Trust Fund Calculator. This figure assumes an initial £250 payment with an additional payment of £250 at age 7. It takes in to account rules the Government has made to limit the amount a provider can charge you for running your child's account (a maximum of 1.5% a year or £1.50 a year for every £100 in the account), and includes calculations based on assumptions about the rate at which shares are changed to less volatile investments from 13 to 18. The figures do not allow for any costs of buying and selling investments.
The projection figures provided above should not be considered a reliable indicator of future performance. They should not be relied upon to make an investment decision. Projections from individual Child Trust Fund providers will vary.
*** 2009/2010 academic year. Source: Direct.gov.uk
