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Child Trust Funds were launched in 2002 to encourage patents to set up savings accounts for their children, from birth onwards. At birth, babies are given a £250 voucher by the government, to open a Child Trust Fund (CTF) account. Parents and other relatives are encouraged to contribute regular payments. Even a modest monthly contribution can accrue to quite a substantial sum that can be accessed by your children when they pass their 18th birthday. A second contribution of £250 comes from the government on your child's seventh birthday.
Although all children are given their £250 voucher, responsibility to open the account falls firmly with you as a parent! Open the account as early as possible in order to maximise the interest against the account!
Many different banks, building societies, mutuals, supermarkets and others offer CTF accounts. All will be managed in slightly different ways and with different rewards. When comparing accounts, look at the interest rates, management costs and any other rewards or benefits that they offer.
There are three types of fund:-
- Savings account: money invested earns interest, your child will receive the full amount invested plus interest accumulated over the life of the account.
- Share account: money is used to purchase shares. Shares can increase in value much more than a pure investment account, but as we've seen over the last few years, shares can prove a risky investment. There's no guarantee that you will get back as much as you invested over the years, although typically a share investment should provide a good return over 18 years.
- Stakeholder account: this is a more managed style of account. Money is initially invested in shares but as the child reaches 14, money is gradually moved from shares to cash, with money earning interest as a savings account.
The savings account offers least risk, but possibly the lowest return. Share accounts could offer the best return, but also presents the highest level of risk. The stakeholder account offers a suitable compromise - potentially higher return with the risk managed to minify the chance of losing your investment altogether.
There are Sharia and Ethical investment funds available, and there may be other funds offered by specialist providers to cater for other values and beliefs.