Get the Most from your Child Trust Fund

19-Aug-2009

Although the 'green shoots' may be showing now across the world's economies, parents are clearly worried about the future effect that billions of pounds' worth of debt is going to have on the lives of their children.  The Yorkshire Building Society has reported a 20 per cent rise in applications for Child Trust Funds in the past month.   

A Child Trust Fund is an investment product that ensures that parents can use to provide their children with a cash lump sum when they reach 18, which will ensure that, whatever the financial climate, they have a head start with their savings.

However, the Yorkshire's research also shows that a sizeable number of parents are using other savings accounts to prepare for their children's future.  Brand recognition is cited by parents in the survey as the main factor when choosing a child savings account, with 'the interest rate offered' coming in a surprising second.  However, by using a well-known brand for their savings purely out of familiarity, parents could be losing out on valuable interest. 

How can a Child Trust Fund benefit my child?

A Child Trust Fund is a long-term savings and investment account for children.  It was introduced by the government for children born on or after 1^st September 2002.  There is no tax charged on interest earned through the account, and £250 is added to the child's account when it is opened.   Although the fund must be started by a parent or guardian, the money legally belongs to the child, and they can access the savings when they turn 18. Lower income families may be eligible for an additional £250 payment from the government.  Visit the Child Trust Fund website for more information about this.

There are three different types of Child Trust Fund to choose between; savings accounts, accounts that invest in shares and stakeholder accounts.  Click on the link to find out more about the different types of Child Trust Fund.  The type that you should choose depends on whether you are prepared to take a financial risk in order to potentially see greater rewards.  As with other investments and savings accounts, the highest interest rates can be found on the higher-risk accounts, but you can move between accounts at any time so your initial decision does not have to be final.

Shop Around for the Best Interest Rate

Your choice of provider does not need to be set in stone either, and therefore parents are encouraged to be proactive and shop around at regular intervals to ensure that they are getting the best possible deal for their children's savings.

Chris Edwards, Yorkshire's Head of Savings&Mortgages said: "Child Trust Funds are a really good way for parents to save for their child's future. However, we're urging parents who have existing Child Trust Funds or those who are in the process of choosing a provider, to shop around for a good deal".  According to the Yorkshire's own data, over half of all parents surveyed (52 per cent) who have children eligible for a Child Trust Fund do not realise that they can transfer to another provider.

One current offering is the Yorkshire's own Child Trust Fund.  According to Edwards, just £10 per week saved in a Yorkshire Building Society Cash Child Trust Fund since the child were born would be worth approximately £11,740 when the child reaches 18 but a provider paying just 1 per cent less in interest [in total, over the life of the fund] would mean that they would get just £10,870, an £800 reduction in lost interest over the duration of the fund."  This example illustrates the need to be proactive in order to get the best savings - the Child Trust Fund can be moved at any time, so it's up to the providers to remain competitive.  The child can themselves make decisions about how the money should be managed from the age of 16.

Check with the fund provider about any fees that you will be charged over the duration of the account. Unless you are completely certain about the type of Child Trust Fund that is best for you, it's best to consult an independent financial adviser before committing to an investment.