An Explanation of Child Trust Funds

Every parent wants to give their little one the best start in life, which is why the Government created The Child Trust Fund (CTF). Believe it or not the Government even gives you money - for free - for you to open and invest in an account for them. This makes it even easier to start saving money for the future.

A Child Trust Fund is an easy and effective way to begin saving for your child and help to give them a great financial start to their adult life. And what’s more, if you start adding to their account now and continue to do so regularly, at 18 your child could have a lump sum to go towards further education, a car or a gap year trip travelling the world.

Every eligible child born since 1 September 2002 is sent a £250 voucher by the Government (and will receive a further £250 if your family receives full Child Tax Credit). You get the voucher soon after you register for Child Benefit and must use it to open a Child Trust Fund account with a Government-approved provider.

There are three types of Child Trust Fund to choose from:

• Stakeholder – investment is linked to shares (to take advantage of their greater potential for growth) until the child is 13, then money is gradually moved to less risky investments. Charges are limited to 1.5% of the account’s value each year. This type of account is the Government’s preferred option. However, as the account is shares-based, the child could get back less than is paid in.
• Shares-based – similar to stakeholder (with investment usually in or linked to shares), but there is no requirement to move money to less risky investments from 13, and no limit on providers’ charges. Like stakeholder accounts, the child could get back less than is paid in.
• Cash account – like a bank or building society savings account. The child is sure to get back the amount paid in, but interest rates can fall, and the account may not keep pace with inflation.

With all three types, nobody can access the money except the child, and then not until they reach 18.

When your child turns seven, she gets another £250 (again with an extra £250 if you're still getting full Child Tax Credit).

You, your family and friends can keep adding to the account on your child’s behalf. Between you, you can pay up to £1,200 into the Child Trust Fund each year, from one birthday to the next. This means you can adapt the amount you pay in to suit other financial commitments you have.

All the money, including investment growth (which is free from income and capital gains taxes), belongs to your tot but they can't touch it until they're 18. But by then there could be a lump sum waiting for them – and there'll be no personal tax for your child to pay on the amount paid out.