Trust Funds

In 2005 the government introduced the Child Trust Fund, or CTF. This scheme is designed to encourage saving, particularly amongst those from lower income backgrounds.

The CTF continues to draw considerable interest from new parents as it entitles every child born after 1 September 2002 to a one-off payment from the government of £250. This rises to £500 in the case of the children of parents on lower incomes.

Tax efficiency

The Child Trust Fund offers a tax-efficient way in which parents, grandparents or friends can save on behalf of their children. The initial sum deposited by the government is intended as a starting point for saving; however, it also means that the child will receive some financial assistance as they begin their adult life even if the parents have not continued to contribute to the fund.

CTF accounts are a long-term savings vehicle with very specific rules. Their most important feature is that, although parents or grandparents may contribute to the fund (indeed, they are positively encouraged to do so), they may not withdraw from it. The only individual who has the right to make a withdrawal from the account is the child in whose name the account is opened, once they reach the age of 18.

One of the most attractive characteristics of the Child Trust Fund is its tax-free status. A parent, grandparent or friend may pay up to a total of £1,200 per year into the Fund, and this will not incur any income or capital gains tax at either the time of deposit or upon maturity of the account.

The £1,200 limit has meant that some parents have considered an ISA to be a better option for their child as they have a larger tax-free capacity. However, the initial £250 ‘bonus’ has meant that the CTF is still highly attractive. This was compounded in the Chancellor’s budget of 2006, in which it was announced that a second payment would be made into the account of each child on their seventh birthday.

This payment would total £250 for most children, or £500 for those whose parents had an income of less than £14,995 in the 2007/2008 tax year.

Account types

When a CTF is opened, the individual taking on responsibility for the account is required to decide between three different account types. These are similar to choices that might be made for some other savings vehicles.

The most commonly chosen is the traditional ‘savings account’ model, whereby the money is saved risk-free in a regular interest-gaining account. Although the lack of risk involved in this option is tempting, it is worth remembering that the effects of inflation will mean that the interest will be worth less in real terms on maturity.

Finally, the account opener could also choose a stakeholder option, in which the money is split between shares in a number of different companies. This presents a lower risk than investing in a single company, and is well worth investigating if you are looking for a compromise between risk and return.

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