The first Child Trust Fund babes have started school, where they will be taught how to manage their money at 18. In the meantime, Alison Brace has advice for parents left holding the cash.Child Trust Funds (CTFs) reached a milestone this autumn when the first recipients of the Government’s pound;250 vouchers started school. This was the cue for another announcement by ministers - that those same children, born on or after September 1, 2002, would be learning all about personal finance and CTFs in the school curriculum.
The children themselves might not be able to lay their hands on the “free” cash until they are 18, but ministers are taking no chances: they don’t want their government-sponsored nest eggs squandered in a weekend shopping spree or a university freshers’ week.
More than pound;11 million is being ploughed into developing curriculum resources to help children understand money - and to make sure their generation is more cash-savvy than its debt-ridden parents.
But let’s face it, there’s little point in a child having all those financial skills at 18 if the parents don’t make the most of the CTF in the first place. So here’s some advice for all those hapless parents left baby-minding the cash until their little darlings come of age.
“Just sticking the money in a deposit account is not necessarily the best home for it,” says Donna Bradshaw, a financial planning strategist with IFG Financial Services. “It’s important that parents remember they are investing over a long time frame and, as a rule, equities outperform cash over a longer term.”
When you receive your pound;250 voucher, it’s worth remembering there are three options: you can put the money in a cash deposit account with a bank or building society; place it in an equity-based investment, or plump for the Government’s preferred option, a stakeholder account.
Here the money is invested in shares and bonds, but after your child reaches 13, the money is “lifestyled” - put into less-risky funds - to minimise the risk to your investment.
Under the Government’s stakeholder rules, annual charges are capped at 1.5 per cent for these accounts. Even if you are averse to risk, an equity-based investment or stakeholder account might be the best option with a CTF, says Donna. “People who take the risk are likely to end up with a better return in the long-term.”
She cites a survey by Barclays that looked at records from 1899 onwards. It showed that during an 18-year period, there was a 99 per cent probability that equities outperformed cash.
Even over 10 years there was a 93 per cent probability of an investment in equities making more money than a cash account. But, of course, no investment in stocks and shares is totally guaranteed. It’s always best to seek out an Independent Financial Advisor - and test your attitude to risk (www.unbiased.co.uk).
Victoria Edmunds, an English and media studies teacher from Gloucestershire, decided to invest her daughter Gracie’s voucher with the Halifax’s stakeholder CTF. “My parents’ financial adviser said we should invest the money in stocks and shares because the potential for growth is better,” says Victoria, 30, who teaches at Chipping Campden School in Gloucestershire.
She pays pound;25 a month into the account and, with husband Neil, also opened a savings account for their 19-month-old daughter to pay for trips and necessities for school. “Hopefully the Child Trust Fund will help to pay towards university at 18,” says Victoria.
Estimates by the Halifax suggest Gracie will enjoy about pound;6,490 at 18 if the yearly growth rate averages 7 per cent. Of course, the fund will become even bigger when Gracie receives the Government’s second payment of pound;250 at seven.
Grandparents, parents and friends can also top up the account annually to a maximum of pound;1,200 a year. If they did that, Gracie could be looking at in excess of pound;20,000. If you opt for a cash account CTF, then Which?, the consumer champions, pick out the following building societies as the best CTF buys: Yorkshire, Chorley and District, Skipton and Shepshed.
Remember, though, if your provider’s interest rates start to go down, you can switch to another account, or even to a share-based one.
“Whatever you do, you still have to hope that kiddiewinkie doesn’t spend it all at 18,” says Donna Bradshaw.
Hopefully, those new personal finance lessons will put paid to that.
www.childtrustfund.gov.uk.
