Irresponsible Parent Opens Child Trust Fund

Just over 3 months old and already we are planning JP’s brilliant career in; golf, football, tennis and, my personal favourite formula one.  No pressure son!  If he does grow up hankering for hot tarmac and a kamikaze need for speed we need to accelerate our savings plan for him now.

The £250 child trust fund voucher from the government (thank you Mr Darling) has been rescued from the pile of junk mail (annoying), congratulations cards (lovely), bills (too depressing for words) and invested in an ethical stakeholder account.

JP won’t be able to get his diesel stained mittens on the cash until his 18^th birthday.  I hope at the very least it can pay for a celebratory holiday / bash / beer when he passes his exams.

Here is how I invested JP’s Child Trust Fund voucher:

1.  Made sure I was sent a child trust fund voucher by signing and returning the child benefit form.

2.  Received voucher through the post, went online to government website to get the lowdown on child trust funds.

In summary, the child trust fund is:

• a long-term savings investment account which your child can access on their 18^th birthday
• a government tool to help your child understand the benefits of saving
• to be used within a year of you receiving it or the government will invest it for you
• opened via a Child Trust Fund voucher (either £250 or £500 depending on whether your household income is over or under £15,575)
• topped up with a further £250 or £500 from the government when your child reaches seven years old
• topped up to £1,200 per year by you, relatives or friends (optional)
• is tax free and does not affect any other benefits you may be receiving

3.  Reviewed the three different type of child trust fund accounts:

• Stakeholder Account – your child’s money is invested in company shares until the child is 13 when it is then moved to lower risk investments.
• Shares (non-stakeholder) Account - your child’s money is invested in company shares. Unlike the stake holder, money isn’t moved into lower risk investments when they reach 13.
• Savings Account - your child’s money is put into a cash savings account which pays interest.

I decided to go for the stakeholder account, as the middle path – medium risk – investment for JP as he will be investing in company shares over an 18 year period.  Historically, over and 18-year period, accounts that invest in shares almost always do better than savings accounts, according to the government’s CTF information booklet.

Furthermore, the money will be spread over a range of investments and when he reaches 13 the money will be gradually moved to more secure investments.  Stakeholder providers have to follow government rules to reduce risk.  On the other hand, providers can charge for the account, but it is limited to 1.5% per year.  There is no limit to the shares (non stakeholder) account charge.

Here is my summary table comparing the difference between the three different types of accounts:

4.  Reviewed the 68 child trust fund providers and drew up my criteria; ethical, stakeholder and freebie.

I narrowed my choice from 68 to 3 by opting for an ethical stakeholder account.   Can’t believe there is only 3 ethical stakeholder providers!  You can narrow your choice further to providers offering a free gift when you sign up for a regular direct debit.   Typical freebies include Mothercare or Boots vouchers.   Handy in those first few months for new mums, but consider any charges with the account which may negate the value of the freebie.

As of 27^th May 2009, I found the following free gifts when you set up a regular direct debit for the following child trust fund providers:

5.  Checked the performance of the accounts here and here.

The Guardian article, ‘is cash now best for the kids‘, does show cash outperforming the shares based accounts during the current market turmoil. Cash means that you are guaranteed what you put in, plus interest.  With the stakeholder and shares accounts I am investing in a stockmarket product (company shares) in the hope of a better return, but risk losing what I started with.

Pause to chat with John, eat another square of chocolate and consider whether I think the market will bounce back during the 18 year period of the investment.

6.  True to my optimistic nature, I chose Family Investments ethical stakeholder account as it has a good historic performance pre credit crunch (53.4%). They charge a management fee of 1.5% every year.

The ethical part means it tracks companies involved in the FTSE4Good UK 50 Total Return Index.  To be included in this index companies must make a positive contribution towards environmental sustainability, uphold and support human rights, ensure good supply chain labour standards and avoid any investment in companies involved in tobacco production, nuclear weapons and whole weapon systems. Nice!

7.  Applied online with Family Investments which was simple – mydetails, JP’s details and voucher details.

At the end of the process I was asked to consider setting up a regular direct debit to top up the account. I’ve not made a decision on a direct debit top up because; 1) cash is very tight right now, 2) another investment account may give me greater control (and balance the risk of the stakeholder CTF) and 3) I need to do a financial review of savings and investments before committing further to the CTF.

Its easy to check potential earnings based on account type,  monthly contributions and management charge using this calculator.

8.  Signed up with KidStart as an easy way of making small top up payments every time I shop online.

KidStart isn’t a regular top up payment, but it does mean every time I purchase via its online cashback site, a small commission will be tracked and added directly to JP’s account.  For more information read the Child Trust Funds post – Easy way to save with Kidstart

9.  Drank a cup of tea with chocolate to celebrate opening of JP’s first saving account.  Wish it was a glass of champagne!

Without regular top ups it is unlikely that we will be upgrading JP’s racer red buggy to a Ferrari in 18 year’s time, but I have made a tentative step towards saving for his future.

The government’s aim for Child Trust Funds is to encourage your child to learn about personal finance and the benefits of saving.   After two days of researching child trust funds for JP it is clear that the immediate target audience is, without a doubt, the parents!

Here are the resources I used to help me choose a child trust fund account:

Applying for Child Trust Fund:

You must be receiving Child Benefit to get a CFT voucher, click here for Claim Form

Government guide on how to Open a Child Trust Fund

Child Trust Fund (CTF) Providers

Replacement Voucher

Further Research:

Government Child Trust Fund Website

Money Saving Expert Child Trust Fund

Money Saving Expert Downloadable Child Trust Fund Guide

This is money

My Egg Nest

Compare Child Trust Funds