Child Trust Funds join savings price war

Parents are being urged to switch cash Child Trust Funds as a price war breaks out, new research from MoneyExpert.com shows.

Average standard interest rates on cash Child Trust Funds (CTFs) have increased by over 0.75 per cent since October last year, according to analysis by the independent financial comparison website, and the number of CTFs paying over six per cent has increased.

The Moneyexpert.com figures reveal that the average standard cash CTF interest rate was 5.15 per cent in October 2006, when the Bank of England base rate was just 4.75 per cent. The average is now over 6 per cent – with some funds already paying over 7 per cent – as providers raise rates in line with the Bank of England, or faster.

But MoneyExpert.com warns that the gap between the best and worst cash CTFs is widening. In October last year the worst paying CTF was only 1.75 per cent below the best buy – whereas now that gap has increased to 2.05 per cent.

A family investing the maximum £1,200 a year would lose out to the tune of around £8,500 over 18 years if they took the worst deal compared with the best. And even investing only the two free £250 vouchers over the same period would mean a difference of £351 depending on which rate you choose.

There is little protection against providers dropping rates. Over 60 per cent of all schemes do not offer a guarantee to keep rates above the Bank of England base rate. Only five providers safeguard rates against base rate drops.

Sean Gardner, Chief Executive of MoneyExpert.com, said: “Child Trust Funds are a great way to build a healthy savings pot for your children. However, cash funds can vary dramatically – from the rate of interest they pay to the guarantees, incentives and bonuses they promise.

“Base rate rises tend to spark a price war with savings accounts and it seems that Child Trust Funds will experience a similar boom. If you’re looking to invest cash for your children, you can get some great deals and no doubt there are more to come.

“However there are some poor deals out there and parents should move – or risk a nasty conversation when their child turns 18.”

Parents with a cash CTF can earn as much as 7.15 per cent tax free on a maximum annual investment of £1,200 with Britannia Building Society. But Moneyexpert.com warns that if they were to choose the lowest headline rate of 5.5 per cent with Abbey, their child could lose out by thousands of pounds when the fund matures.

MoneyExpert.com figures show there are now 13 different cash CTF providers. As many as 10 offer headline rates of over 6 per cent and four have deals over 7 per cent. In October last year around half of all providers had deals below 6 per cent.

A maximum of £1,200 each year can be saved in a cash CTF by parents, family or friends on top of the minimum amount of £250 provided by the Government to start the account.

Sean Gardner added: “There’s no excuse for not cashing in your child’s voucher, even if that’s all you do for the next eighteen years. Interest rates are generous so now’s the time to cash in – even a small regular investment could make a big difference to your child.”

In addition to cash accounts parents with child trust fund vouchers to invest can also choose riskier share-based accounts or stakeholder accounts with a spread of investments.