How to make the most of Child Trust Funds

The majority of parents don’t feel confident to make investment decisions and opt for a cash fund.  And whilst this may not produce the best results over the long term, let’s not forget the joys of compound interest.  At deposit rates of 7% a year, your money doubles every 10 years. 

While interest rates today are at an all time low, they aren’t going to stay that way forever.  If you opt for cash, check on the best rates with comparison websites like www.moneysupermarket.com and www.moneyfacts.co.uk.  Make sure you choose a CTF which doesn’t carry penalties for moving to another provider.  The institutions have a nasty habit of offering attractive interest rates to lure investors, only to cut them dramatically once you have put the money in.

Treat it as a wrapper

It’s important to remember that a CTF is just a tax wrapper like an ISA and it is what you put into the CTF which is important.  For the serious investor, several private client stockbrokers offer CTFs which give parents complete freedom to invest in everything from individual shares, to unit and investment trusts as well as gilts and bond funds.

Stockbrokers offering self-select CTFs include Killik & Co., Pilling & Co., Redmayne Bentley, Selftrade, The Share Centre and Walker Crips.  Pilling & Co for example, offers both a non-stakeholder CTF which allows parents to make the investment decisions while for those who don’t want to be bothered,  the stakeholder CTF is run on a discretionary management basis by Pilling & Co.

Annual charges for Pilling’s non-stakeholder CTF, for example, are two six-monthly dividend collection fees of £6.75 per security held.  Dealing commission per deal is 1.65% of the first £10,000 value and 0.5% thereafter on any excess, with a minimum of £10. There is usually no commission charged when buying unit trusts or OEICs.  For the stakeholder CTF the annual charge is 1.5%.  Check with providers on charges before making a decision.

For those who want some control over the investments a tracker fund might be a reasonable compromise.  You can choose suitable investment funds from Citywire’s lists of rated fund managers, of take advice from an IFA. 

The most popular equity based CTFs are those run on a discretionary basis by mutuals and friendly societies like the Childrens’ Mutual, Family Investments and Engage Mutual. 

‘Friendly societies have been actively promoting the virtues of the Child Trust Fund, and with distributors such as supermarkets and high-street chains, have worked hard to encourage parents and guardians to take up their government voucher, and use the account to begin to plan for their child's financial well-being,’ commented Martin Shaw, general secretary of the Association of Friendly Societies.

‘As a result we have seen that even at a time when the level of savings is generally very low, 40% of parents or guardians or grandparents who open a CTF have topped it up, and by an average of nearly £280.  It is clear that they see the account as a great way to build up a nest egg for their children,’ said Shaw.

And he points out that Friendly societies have been at the forefront of reforms which make it even easier to open a CTF.   ‘For example, around a quarter of vouchers are not taken up by parents, and whilst an account is still opened for the child, our research indicates that less that 2% of these have been topped up, meaning the value at maturity will be much lower.  We have been working with government to make it easier to open an account: for instance, from April 2009 it is possible to open a CTF online or on the telephone without having to present the voucher to the provider.’