Parents missing out on Child Trust Fund savings

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Written by Mark Burton
Know Your Money editor

According to HM Revenue & Customs, up to one million households have failed to use the first £250 CTF voucher launched in 2005, with parents up and down the country being urged to make sure they make the most of the next payment opportunity.

Developing a CTF strategy

When the new payments are handed out at the beginning of next month, parents with children born on or after September 1st 2002 will automatically be entitled to another £250 payment, or £500 for low-income families.

This time around, children will still receiver their entitlement even if parents do not cash in their voucher, but failing to act on a child's behalf could result in the one-off payment working a lot less hard than it should.

As the Guardian reports, although all children born after the cut-off date will automatically receive the money, HM Revenue & Customs will automatically put the money into a stakeholder CTF unless parents pick out a fund.

Stakeholder CTFs are linked to the stock market and with equities still in a fairly perilous condition, some parents may prefer to put their child's money into a safer investment vehicle, rather than risk seeing the one-off payment wither during this period of economic weakness.

Another reason for parents to take control of their child's CTF sooner rather than later is that the taxman will only begin allocating the payments to stakeholder funds after a year of the voucher going unclaimed.

This means that the money will be sitting idle without earning any interest for a full year, failing to take advantage of the incentives offered by the funds.

For those that are keen to avoid this happening, the key decision will be whether to opt for a cash or shares CTF.

Safety and simplicity or the lure of higher returns?

In today's economic climate, many parents may be keen to opt for safe investments and if this is the case, cash-based CTFs will provide a secure, steady return until the account matures, allowing parents to relax knowing that the money is looked after.

However, in previous years many parents have been drawn to shares-based accounts as they are typically capable of delivering higher returns than a cash-based CTF.

But as the events of the last year have shown, the price of stocks and shares can fall as quickly and dramatically as they can rise, which may discourage parents for a shares-based CTF as a long-term investment.

However, there is also an argument to be made that with the stock market showing signs of recovery but still far from pre-crisis peaks, a well-managed shares CTF could help to make the most of the £250 investment.

For those that do decide to opt for a shares-based CTF though, finding out which of the government's approved accounts will offer the best return may prove tricky.

As David White, the Children's Mutual chief executive, has conceded, information on the performance of individual CTFs can be difficult to get hold of, making a comparison difficult.

Speaking to the Guardian, he said that it is a problem that the industry needs to look into, although at present parents intent on opting for a shares-based account may need to be prepared to call around or search the web for details of the best deal.

However, for those that find comfort in numbers, Family Investments may be an attractive option, as the company has this month become the largest supplier of CTFs in the UK after taking on more than 400,000 accounts from Abbey.

John Reeve, chief executive of Family Investments, commented: "This deal with Abbey Investments confirms our position as the UK's leading CTF provider. It is four years since CTFs were first introduced and this consolidation of the market is part of its overall evolution.

"This is a positive development as CTFs are becoming concentrated within specialist providers dedicated to managing them for the long term."

Meanwhile, a poll of customers carried out by the group also revealed that nine out of ten parents would recommend Family Investments to a friend.

Parents can find out more about their options on Know Your Money's child trust fund page.

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