Child Trust Funds

Most parents want to invest for their children, but with so many different investment plans available it can be hard to know where to start. Use our guide to find out about the different types of Child Trust Fund accounts that are available, and to help you find the right investment to save for your child's future.

You can start to invest for your child as soon as they are born, and the sooner you start a child investment fund, the longer it has to grow.

As with all investments, it's important to ensure you can afford any monthly contributions you make to your child's investment fund. But, equally, it's good to remember that even small amounts add up quickly, and, if you arrange a monthly direct debit from your account you'll hardly notice the money has gone.

There are a number of options available when it comes to choosing a child investment fund. As with all investments, your choice will be determined by the investment term and any associated risks.

Child Trust Funds are being phased out, this means that only some parents are still eligible for receiving a voucher from the government to set up a Child Trust Fund. Presently, the government changes to the system mean that:

• If your baby is born before August 1st 2010, your payment will be £250
• If your baby is born after August 1st 2010 your payment will be £50
• If your income is less than £16,190, you will get £100 after August 1st 2010
• Any baby born after 1st January 20101 won't receive any payments
• here will be no top-up payments from the government after August 1st 2010.

A Child Trust Fund is a savings or investment account for children. The government introduced the Child Trust Fund to encourage parents to invest for their child's future. You, the parent, can then choose what type of Child Trust Fund to invest this money in.

Summary of Child Trust Fund features:

• Each child can only have one Child Trust Fund account.
• Once money has been deposited it cannot be withdrawn until the child turns 18.
• A maximum of £1200 can be saved in the account each year. This has not changed since the government made their decision.
• There is no tax to pay on either the income or gains in the account.
• When a child turns 16 they can decide how the money in the account is managed.
• The money can be moved to a different type of Child Trust Fund account, or to a different provider at any stage.

The key thing about the Child Trust Fund account is that it belongs to your child, and it can't be touched until they turn 18. It is a long-term investment.

There are three main types of Child Trust Fund accounts to choose from.

A Child Trust Fund can be a savings account, a shares account, or a stakeholder account.

The account you choose depends on how you feel about taking a risk with the money you invest for your children.

• Child Trust Fund: Savings accounts
  You can choose a straightforward savings account for your child's Child Trust Fund. With a savings account the money you invest is considered virtually risk-free. That means if you invest £1000, your child will get that sum of money back as well as any interest the account has earned.
• Child Trust Fund: Accounts that invest in shares or bonds
  You can choose a Child Trust fund that invests your child's money by buying shares or bonds in companies. This type of account gives you the greatest flexibility. You can choose the companies to invest in yourself, or alternatively you can choose to have the investment fund professionally managed by investing in an investment fund such as a unit trust or investment trust. You can also choose the mix of shares and bonds.  If the companies do well and the shares go up in value, the account makes money. If the shares lose value then the account also loses money. Investing in a Child Trust Fund shares account is more risky than putting money in a savings account, but the rewards can be greater. Bonds are also more risky than savings, but not as high risk as shares.
• Child Trust Fund: Stakeholder account
  You can choose to invest for your child in a Child Trust Fund stakeholder account. This type of account also initially invests your child's money in shares in companies, but a stakeholder account has to abide by certain rules made by the government, designed to reduce the risk of investing in shares.  In a stakeholder account your child's money is not invested in just one company, it is invested in a number of companies - this spreads, and therefore reduces, the risk.  In addition, with a stakeholder account, when your child turns 13 the money in the account automatically starts to move from shares to lower risk investments. This concept is called "lifestyling". The investment fund is progressively sheltered from stock market fluctuations by increasing the ratio of bonds to shares as your child gets closer to 18.

Note: The Child Trust Fund scheme is no longer available. However, the government is launching an alternative Junior ISA scheme from 1st November 2011. 

All savings and investment accounts carry a fee to run them.

• With a savings account this fee is factored into the interest rate the account earns.
• With a shares account the fee is normally a percentage of the account value and varies between account providers.
• With a stakeholder account the fee is a percentage of the account value, but this cannot be higher than 1.5% per year.

Because a Child Trust Fund is a long-term investment you need to consider the effect of inflation on the money you invest for your child. The effect of inflation means that money loses value over time. Prices rise each year and as a result £100 won't buy you as much in ten years time as it does today.

For your child investment fund to grow in 'real' terms, that is, for it to have a greater value in the long term, it needs to keep pace with, or beat, the rate of inflation.

Compare Child Trust Funds