Money matters - all about the Child Trust FundAs child trust fund vouchers appear into UK households, we asked Moneywise editor Ben Livesey about the what parents are going to receive and, most importantly, what parents can do with it!
The Child Trust Fund, a new savings and investment account, was launched by the government this year to help give children a financial start in life and a guaranteed nest-egg when they reach 18. All children born since 1 September 2002 are entitled to a child trust fund (CTF) but the amount they receive depends on parental income and their date of birth. A family household income of over £13,480 means a child will receive £250, while those with lower incomes will get £500. Children born between 1 September 2002 and 5 April 2005 will receive higher entitlements of £277 (or £543 for lower incomes) to compensate them for the time they were unable to invest their entitlement. The government has also promised to give another £250 contribution when the child reaches seven. The funds cannot be touched until the child reaches 18 years of age. The different types of CTFEven though the money will not be available until 6 April 2005, it is important to start thinking about what type of plan you want for your child as soon as possible. There are three different types of CTF to choose from: deposit accounts, share-based accounts and stakeholder accounts. Ben Livesey, editor of Moneywise magazine, highly recommends choosing either the share-based or stakeholder accounts to get a higher return for your investment. "Cash accounts are fine for a short-term investment but not over a longer period. If you allow for a modest 4 per cent growth rate over the years, your money will only increase to around £1,000 at the end of it, which isn't much after 18 years!" What are the differences between share-based and stakeholder accounts, then? "Stakeholder accounts do invest in the stock market but are designed to manage the risk for investors," explains Ben. "Most stakeholder accounts are tracker funds and replicate the FTSE 100. If things start going downhill, money can be invested elsewhere to minimise the losses." However, there is a disadvantage to these accounts. "When the child reaches 13 years of age, the stakeholder accounts will automatically move the money into safer, cash-based investments," says Ben, "and many critics think this is a mistake as children could, therefore, miss out on a big profit." Share-based CTFsThese CTFs are managed by traders, rather than by computers, as is the case with stakeholder CTFs. The advantage is that humans can be clever and outperform the FTSE, bringing in large profits. On the other hand, humans do make mistakes too and this could end up in your CTF underperforming and losing money. "At the end of the day, your decision will have to be based on which fund you feel happiest with," says Ben. "All investments that rely on the stock market are inherently risky - that is the price you must be willing to pay in order to potentially reap bigger financial rewards." Who to chooseUnfortunately, parents do not seem to have such a wide range of CTF providers to choose from as they do with their other financial products. Currently, the following companies have said they will be launching account: Abbey, F&C Asset Management, Barclays, Halifax, Homeowner's Friendly Society, Scottish Friendly, Family Assurance and The Children's Mutual. The high-street banks and building societies will be able to offer either cash-based or stakeholder plans but not the share-based ones. If the share-based account is your preferred investment method, Ben Livesey recommends talking to an independent financial adviser on the best way forward. Keeping it healthyHaving a neat lump sum in an account, earning interest, is great but why not add to it to give your child an even greater start in life? Up to £1,200 can be invested into the account each year, which will make a sizeable difference if you want to set something aside for your child's future. There will be no capital gains or income tax to pay on any CTF accounts and parents can contribute the maximum yearly amount without fear that the interest will be treated as theirs for tax purposes if it exceeds £100 a year, as it currently is with ordinary children's savings plans. The money will be available to be paid into an appropriate account from 6 April 2005, so it is worth getting your skates on now to sort this out. You will have 12 months, from this date, to set up an account for your child. If you haven't done so in this time, the government will invest the money for your child into a random stakeholder account, regardless of which one is performing best. So it really does pay to do your reading and find out how you and your child can best benefit from this gift! Where to next?
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