by Dr Pandula Siribaddana

Created on: April 24, 2010

How it all began:

In the year 2005, the UK Government introduced a new scheme to promote savings for supporting the children who enters adulthood and this innovative method was named as a ‘child trust fund’ or CTF. The basic idea of this scheme is to build a considerable amount of savings for a child to invest in their future education or whatever purpose from the contributions from their parents, well wishers as well as from the government. The unique feature of this fund would be that it want be accessible to anyone till the child turns 18 years.

Who are eligible?

All children who were born after September 2002 becomes eligible for this scheme whereas all those who were born after 2005 will automatically gets enrolled into this programme.

How to start the CTF?

The fund is initiated though a contribution voucher of 250 £ from the government on behalf of the child and will be augmented by further 250 £s when the child is 7 years old. Till the child turns to 18 years, neither the child nor the parents of the child would be able to take money from CTF but, anyone who wish to deposit money can do so within the limit of 1200 £s worth deposits for a particular year or 100 £s per month.

What happens to its interest?

The interest earned from these deposits will be tax free and will get add-on to the CTF throughout its existence.

What are the options available in investing?

The role of the parents in this scheme would be their decision to form the fund in one of the three ways that are given as options. These options are,

Invest in a savings account Invest in stock market Invest in a stakeholders equity fund

The first option would be the safest as this is a usual savings account which will carry a higher than normal interest rate. The second option would be the highest yielding of the lot but would have the highest risk in return as well.

Basically, the second option would invest money in the stocks and shares and the return would be added to the CTF. But, in case there are stock losses, the same will reflect on the CTF as well. The third would be a moderate option to take in which a equity manager or a bank would take charge of the money and invest in certain shares with less risk and thereby improve the returns rather than having it on a savings account.

The difference between the 2nd and the 3rd options would be the government restriction on the annual management charge which will be beneficial in option 3 but would not be present in high yielding option 2. At the same time, when the child reaches age of 13 years, the funds in a stakeholder equity fund would be transferred in to a safer savings money account to minimize the losses.

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