Child Trust Funds
For children born in the UK after September 2002, the government introduced a cash scheme which issued their parents with vouchers worth £250 and a little later on in 2005 and 2006 parents on an income lower than £13,910 received the sum of £500 on the birth of a child.
In accordance with the rules outlined for this scheme, vouchers must be invested into a CFT (Child Trust Fund) available from banks, building societies and most mutual insurers. These funds can be topped up to £1,200 each year tax-free unlike other child savings accounts where earned interest in excess of £100 is regarded as the guardian’s money and tax is therefore paid. Therefore by the time the child starts school a tidy little sum has mounted, this is of course providing the parents have managed to invest this money wisely.
A further £250 top up has been pledged by the UK government once the child reaches 7 years old with another possible top up during adolescence. Once the child is 18, he/she will have access to the fund and may spend the capital however they choose. However the government hopes the child’s intention will be to finance further education or possibly re-invest into an ISA individual savings account.
Once parents or guardians receive the initial voucher they are presented with a choice of 3 types of CTF accounts in which to invest it. These accounts are: a cash account which functions like an ordinary instant-access savings account which is tax free, a stakeholder account or alternatively a non-stakeholder account. Naturally the governments preferred choice of investment is that of the stakeholder account as although the cash is invested in high risk equities, later switching over to more secure bonds, fees are capped at 1.5% of the value of the fund per year. With an equity based account the financial rewards can be much more interesting although nothing is guaranteed with high risk investing. However the look term outlook is much more favourable than a standard cash account.
On receiving the vouchers parents have up to 12 months in which to decide how they may invest before the government itself will step in and take charge over the investment decision. In most cases the voucher is placed in a low performing stakeholder account so it is wise to check the market for the best return investment deal.
Child Trust Fund accounts were launched in the UK in April of 2005 and backdated to children born after September 2002. Since then some 3 million accounts have been opened, the majority being stakeholder accounts which parents or guardians have managed to top up over the years increasing the final value of the investment.
Whichever CTF account parents choose, they are not locked into it and can transfer funds to an alternative account if they so wish. Many cash accounts now pay out competitive rates of interest, anywhere between 7 to 7.5% AER. A wise approach would be to follow the trends and the markets in order to capitalise on the best investment or if you are not financial minded, seek the advice of a trusted financial advisor.
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Published on September 30, 2007
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