by Simon Wright

Created on: April 28, 2010

Parents in the UK are able to invest money for their children into a tax-free Child Trust Fund (CTF) that the government also contributes towards. The scheme has understandably proven popular but the fact that there are three types of Child Trust Fund available means it can be confusing for first time parents to determine which one is best suited for their child.

Let’s look then at the options and what parents may wish to consider to determine which scheme is best suited for their personal circumstances:

CTF Savings Account

Basic features:

 - Tax-free Savings account

 - Annual deposit limit of 1,200 pounds

 - Account belongs to your child

 - Government will provide an initial payment at birth, and a further top-up payment when the child turns seven.

 - Your child can only access the money when they are eighteen.

Pros and cons:

Savings accounts are well suited for people who are risk adverse, as there is no risk of losing the invested capital and you are guaranteed to receive some interest over the course of the scheme.

Investing in a CTF Savings Account therefore means that you benefit from the certainty of knowing that you will have accumulated a decent fund for your child.

However, we’re currently in a very low interest rate environment and historically shares have outperformed savings accounts for return on investment.

Therefore, you face a trade off between the certainty of not losing your money versus the possibility that you won’t maximise returns.

CTF Stakeholder Shares Scheme

Basic features:

 - Money invested in a range of equities

 - Annual management fee of no more than 1.5%

 - When the child turns 13, the funds are transferred out of equities into lower risk investment instruments such as cash

 - Returns are tax-free

 - Annual deposit limit of 1,200 pounds

 - Government will provide an initial payment at birth, and a further top-up payment when the child turns seven.

 - Your child can only access the money when they are eighteen.

Pros and cons:

The Stakeholder Shares CTF scheme may appeal to people who aren’t averse to money being invested in the stock market but who are still quite conservative in their risk appetite.

The fact that the money is transferred into less risky assets when the child is 13 means that you won’t suffer if the stock market suddenly crashes just before your child turns 18.

However, the downside is that you only get the benefit of 13 years

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