What is a Child Trust Fund

Since 1st September 2002, all new parents have received a £250 voucher to invest on behalf of their child, called a Child Trust Fund (CTF). When the child turns 18 he or she can then do with the investment as they please.

The Child Trust Fund was bought in to give young adults a start in life. If invested wisely the original sum can build up fairly significantly. Parent who earn less than £15, 575 a year; receive an extra £250, doubling the amount they can invest on behalf of their child. Parents can add to the amount to a sum of up to £1,200 each year.

There are three ways that this money can be invested. The first is in a Savings Account. The advantage of this is that the value cannot be reduced. When he/she turns 18 the child receives the invested amount plus the interest in has gained. The downside of this option is that although interested is guaranteed, it is not going to increase dramatically, and the increase could be less than inflation. Investing the Child Trust Fund in company shares could be the most profitable, but is also the riskiest option. If the companies in question do well the amount could increase significantly, but there is the possibility that the shares could go down. A stake holder account is the third and final option. Like shares, the fund is invested in company shares. However there are certain government rules that make them less risky, but also less profitable if things go well. It is spread around different shares, which again makes the risk smaller. With a stake holder account the money starts to be moved into small risk investments once the child is 13.

If the parents do not use the voucher within one year of their child’s birth, the money is invested in a stake holder account by the government. This means the choice is taken out of the hands of the parents. Even if this is how the parents would choose to invest the Child Trust Fund, there is still the disadvantage that they have lost a years worth of investment.

As well as the obvious benefit of giving an 18 year old a sum of money to start their adult life with, according to the government there are other advantages. They say it gets children into the habit of saving, teaches them the benefits of saving, and helps them understand person finance.

There is no doubt that this government scheme is helpful to young adults, as it gives them a financial head start. Even the original £250 would be helpful, but once that has been invested, especially if wisely and with a bit of luck, it could be a big boost to an 18 year old.

Andrew Marshall ©

Child Trust Fund