Are Child Trust Funds the new shares?

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By Rachel Jones
Know Your Money Editor

Parents looking for a way to build up a nest egg for their children may have, up until now, relied on savings accounts as a way to stash their cash. But with many banks and building societies withdrawing their best performing products as the Bank of England's recent interest rate cut gets taken onboard, many savers may be left wondering where to put their hard-earned money. One financial product that experts are urging parents to make the most of is a Child Trust Fund (CTF). Since it cannot be accessed until youngsters reach the age of 18, this could be viewed as a long-term savings vehicle that can provide some financial stability for life's decisions - a new car, home, university or a round-the-world trip. But are CTFs more fruitful than investing in shares, an avenue that many parents may have gone down in the hope of shoring up some money for their kids?

Sharing the wealth among Britons

According to the Guardian: "The conventional wisdom was for parents to invest in shares - but with the markets in turmoil, the safe option may be the long-term winner." Such a winner, the newspaper notes, could be a CTF. Shares have historically performed better than savings accounts over a longer period and therefore many adults choose to provide for their kids' futures in this way.

But according to Lloyds TSB Wealth Management, 28 per cent of stock market investors claim that they have moved all or some of their money into investments such as bonds or cash over the past six months.

"Money is still moving to safer investments, such as cash and bonds, as confidence in the future of the markets continues to be shaky. However, investors should keep an eye on their long-term goals and seek professional advice before making any decisions," urges Nathan Moss, managing director of Lloyds TSB Wealth Management.

The research also reveals that 58 per cent of investors are concerned about stock market investments over the coming year, although a fifth feel confident about the future of this area.

But why are CTFs perceived to be the more sensible option for parents?

Placing trust in a child's future

The government provides every child who was born on or after September 1st 2002 with a voucher worth up to £500 which must be used to open a CTF account by parents on their kids' behalf. Family members can place up to £1,200 a year in the account and all gains and income are tax-free. As such, parents may want to ask friends and family to contribute to the account, rather than buy their children gifts on birthdays or at Christmas. This could be a credit-crunching solution for individuals worried that youngsters will soon get bored of their presents and never use them again.

And according to the Children's Mutual, over four million children aged up to six-and-a-quarter now have a CTF in their name. The organisation reveals that many parents are taking the recession as an opportunity to start bolstering their offspring's financial security and that the credit crunch has brought home just how important putting money aside is for when it is most needed. Getting a foot on the property ladder and funding education and training are some of the ways this money could be used.

David White, chief executive of the Children's Mutual, comments: "The CTF is well placed to assist families in planning their children's financial future, especially at these difficult times, as it allows any family member or friend to contribute. In this way, ensuring that through a group effort of little and often, children can maximise the potential future growth of their fund."

Since 2007 there has been a 16 per cent increase of customers choosing the Children's Mutual to open a CTF, the organisation claims. And a record number of parents invested their children's Christmas money into these accounts. Pointing out how easy it could be to build up a substantial cash pot, it states that if both sets of grandparents paid in £10 a month, almost £12,000 could be at hand for when a child reaches 18.

Taking stock of the situation

The stock market can rise and fall, meaning large amounts of money invested could be wiped out, while rumours of companies on the brink of collapse may render shares worthless. CTFs could be the way for parents to give their offspring a financial head start for later life. But as with all financial products, Britons need to shop around and ask for advice when choosing a stakeholder, shares-based or savings-based CTF.

More information can be found at .

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