Wednesday 20th August 2008
by Bob Bardsley
Know Your Money Editor
Child trust funds, or CTFs, are among the ways in which it is possible to save for a young one's future. But at a time when there is much to learn - from changing nappies to the correct way to pick up a baby - what are the reasons why new parents should even begin to think about their offspring's financial security?
Although many people may not be aware of it, setting up a child trust fund comes with the promise of free money from the government, which can then continue to earn interest until the little one is grown up. But time is a factor, due to the problem of government vouchers for that free credit being subject to an expiry date.
How do I open a CTF?
The government provides guidance on many aspects of the process of opening a child trust fund which could prove useful to those who are unsure how best to go about doing so. Before opening a new account, though, consumers are told to choose a provider, as not all trust funds are identical. The advice from HM Revenue & Customs (HMRC) suggests that parents might like to take into account the level of risk that is associated to their preferred account, as some offer a higher return for a higher risk level - but come with the potential to lose money if the gamble does not pay off.
Alternatively, Britons with particular requirements placed upon them by religion or simply by their ethical beliefs might be able to find a product suited to them. HMRC explains that ethical funds are on offer from some providers, while sharia accounts meet with the principles required by the Islamic faith. Once a provider has been chosen, HMRC asserts that an application form may need to be submitted in writing, or the same information given over the telephone. Providers may also need to see identification and the individual's child trust fund voucher.
When should I do it?
HMRC recommends setting up a child trust fund as soon as possible once a new baby is born. The reasons for this recommendation are twofold. Firstly, the fund matures on the offspring's 18th birthday, meaning the sooner money is deposited into it, the greater the chance of obtaining a significant return on payments made over the 18-year term. Secondly, if the fund is not opened by the time of the expiry date printed on the voucher, HMRC will automatically open an account in the child's name, but the parents may lose their entitlement to additional funds from the government.
Parents are also told that they should ensure cooling-off periods do not overlap beyond the child's first birthday, as this could impact upon the official date on which the account is considered to have been opened. Should it be deemed that the account was established after the child's first birthday, the first year's deposit entitlement of £1,200 may be lost.
What's it worth?
The exact amount that may accrue in a child trust fund over time depends on a number of factors - not least whether the voucher is deposited before the expiry date. Figures from financial services provider Nationwide indicate that, so far in 2008, 43 per cent of live vouchers have yet to be paid into an account. Since the introduction of child trust funds, Nationwide claims that one in four vouchers have gone unused, equating to almost £250 million in lost funds when interest is taken into account.
However, the real-terms value of the voucher itself may be waning, according to CTF provider and stockbroker The Share Centre, due to inflation. As the government's contribution is fixed at £250, the organisation claims that the initial value of a new child trust fund is now down by £38 in real terms compared with when the accounts were first created. With inflation predicted to remain above target in the coming months, parents might be looking to top up their trust funds in order to ensure their descendants remain on a good financial footing.
Key Dates
There are relatively few real landmarks in the lifetime of a child trust fund; however, the first anniversary of the child being born is the major milestone. This is the date by which parents should have opened an account in order to deposit their voucher, HMRC advises. Without doing so they risk losing the £250 of initial government funding. On the child's seventh birthday he or she becomes entitled to a further £250, or £500 for families with low incomes.
Once it reaches 16, the child may claim legal control of its trust fund, although no withdrawals may be made at that point. On its 18th birthday, however, the youngster's account comes of age and the funds become accessible - just in time for meeting the cost of going to university.
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