Child Trust Funds – three years on

Three years ago we saw the launch of the child trust fund. Each child born after 1 September 2002 receives a £250 voucher which their parents invest.

The money can’t be touched until the child turns 18 and the idea is that each child will have a good financial start to their adult life.

Michelle Slade, analyst at Moneyfacts.co.uk, comments “The ‘bank of mum and dad’ has become a well known phrase over recent years as many children rely more and more on their parents to help them get on the property ladder. Recent events have shown that in order to get the cheapest mortgage deal you need to have a decent sized deposit. What better gift to give you child at 18 than a nest egg to help them buy their first home?

“Parents can opt for two main types of child trust funds. The first is a cash-based savings account.

“Rates as high as 8% are a fantastic incentive, particularly if parents are making additional top-ups to the accounts. If a parent had invested the £250 voucher plus the £1,200 allowance each year since child trust funds were launched, they would have received £497 in interest.

“The second child trust fund invests in a selected investment fund where the value rises or falls depending on how well the fund performs. Parents can choose to invest in a stakeholder fund where the maximum management charge is no more than 1.5%, or non-stakeholder where the charge can be more than 1.5%.

“Last year the performance of these stakeholder funds was negative but this is a result of the poor performing stock market and the ongoing credit crunch. Child trust funds are long term investments and investment versions are expected to outperform savings versions in the long run.”