The Child Trust Fund
* Read below for important information regarding possible changes to the Child Trust Fund *
The Government has announced plans to scrap the Child Trust Fund for all children born after the end of 2010. Under the proposals, which require legislation to be passed, vouchers for children born between 2 August and 31 December 2010 will be reduced in value from £250 to £50 (from £500 to £100 for low income families), and no vouchers will be issued to children who turn 7 after 31 July 2010. Extra payments for disabled children will cease after the 2010/11 tax year. Parents of children born between 2 August and the end of the year will still have up to a year in which to invest their Child Trust Fund voucher. Parents of children born before 2 August 2010 must apply for Child Benefit before 1 November 2010, in order to receive the higher value voucher. As iChild understands it, parents, family and friends of all children born between 1 September 2002 and 31 December 2010 will still be able to top up the account with up to £1,200 a year, and transfer it to another provider if they wish, and it will continue to grow free of tax until the child turns 18. The dates set out here are subject to the legislation being passed before Parliament breaks for the summer recess on 29 July.
Recent research by F&C Investments suggested that 70% of parents of under-8s would continue to save for their children if the Child Trust Fund were abolished. There are many savings products on the market – either deposit-based (such as a bank or building society account) or linked to the stockmarket, that should allow those parents who wish to provide for their children to continue to save, even without the incentive of a voucher from the government. The Children’s Savings pages on iChild provide a wealth of information on both CTF and non-CTF savings strategies.
You can find further information on the CTF, plus Q&A's from HMRC here.
Applying for Child Benefit triggers your child’s eligibility for the Child Trust Fund. This is a scheme introduced in 2005 for all children born in the UK after 31 August 2002.
Currently, the Government sends you a £250 voucher (£500 for lower-income families) that you can invest in one of a choice of Child Trust Funds, either cash or shares-based.
The account can be topped up by parents, family and friends by up to £1,200 a year. Another £250 (or £500) voucher arrives at age 7, and all the proceeds are paid out to the child, free of any tax liability, when they reach 18.
If your child is disabled and receives Disability Living Allowance, they will receive an extra £100 or £200 a year, depending on the level of DLA they receive.
Choosing a Child Trust Fund...
If you don’t invest your voucher before the expiry date printed on it (which is 12 months after it is issued), the Government will open an account for you. This will be a shares-based ‘stakeholder’ account, probably investing in a fund that tracks a stockmarket index, and with annual charges capped at 1.5%. The Government has chosen a shares-based account as the default option as it gives the best chance of meaningful growth over an 18-year period (although the value of shares can fall as well as rise). Stakeholder accounts automatically start moving the investment out of shares when the child reaches 13, to lock in gains and avoid any nasty stockmarket shocks towards the end of the term.
Cash-based accounts have no risk to capital, but their growth potential is more limited and their purchasing power can be eroded by inflation. Non-stakeholder shares accounts offer the widest investment choice. For example, F&C Investments’ non-stakeholder CTF can invest in a choice of 14 investment trusts covering stock markets all over the world, as well as alternative asset classes including property and private equity. Find out more at www.fandc.co.uk, or for general information about Child Trust Funds, including who offers them, visit www.childtrustfund.gov.uk.
View other relevant articles here, giving more information on How to open a Child Trust Fund, and Budgeting.
