The overwhelming response from parents is that child trust funds (CTFs) are a good idea – after all who would turn down up to £500 to give their offspring a start in life?
But, is it really free money and do all parents benefit?
The government will give £250, rising to £500 in the case of low-income families, to all newborn babies – and yes there are no catches if you meet the age criteria and the money is tied up until the child reaches 18.
In addition, the government has promised that it will make a one-off payment into all CTFs when children reach the age of seven. The amount of that sum has yet to be announced. In the latest budget, a further sum is even under consideration to be granted to teenage children.
However, it’s important to realise that parents will need to top up the gift money with some pretty substantial amounts if it is to pay for their child’s university education, for example.
The average student leaves with debts of around £11,000 and according to Virgin Money, if the full £500 was invested and grew at 7% a year, it would still only be worth £1,410 after 18 years. At the same time, Virgin Money estimates if parents top up the fund by £10 a month, it would grow to £5,210. And if parents paid their weekly child benefit into the fund, it would have grown to a substantial £27,000 after 18 years, presuming - an optimistic - 7% annual growth.
Any growth achieved by the CTF will be tax-free. But those paying in to these funds will not receive tax relief on their contributions.
The scheme has also been criticised as unfair – all parents with children born before September 2002 are not eligible for CTFs.
They must rely on existing children’s savings schemes without the CTF tax benefits. This means, for example, if the initial sum came from the parents and interest is over £100 a year, it is taxed as the parents’.
Eligible parents also face the task of choosing an appropriate home to grow the CTF investment – either a deposit savings account or a stock market based investment.
Unfortunately not all fund managers are targeting the CTF market since they believe they wouldn’t make enough money from it, which is bad news for parents who want stockmarket investments with a bit more potential. Instead, they are proving more popular with high street banks and building societies. However, there are some stockmarket options available, and it is crucial parents investigate the various options rather than being railroaded by marketing.
