Don't neglect your child's nest egg
My one-year old nephew slightly resembles Max Branning. He’s got that big round face and short fuzzy strawberry blond hair. I’m crossing everything in the hope that he won’t have the personality of the Eastenders shifty sales man (and serial adulterer) when he’s older though.
Matthew lives more than 200 miles away in Preston with my sister and her husband so I don’t see him as much as I’d like, but as my first and only nephew (I have no nieces) he is terribly spoilt by his Auntie Ruthie.
Seeing my sister become a mother and all that entailed was a learning curve for me. I didn’t know anything beforehand about feeding babies, the constant loads in the washing machine, the rules about where they’re allowed to sleep (apparently not for long in a car-seat when you’re back in the house) and the whereabouts of nearby child-friendly restaurants.
I was also gobsmacked to discover how much having a baby costs. The list is, frankly, endless as to all the clothes, food, toys, indoor and outdoor contraptions, car accessories and safe-proofing equipment you need to buy. So expensive is little Max, I mean Matthew, that my sister is in danger of retreating to her student days and making her and her hubby live off Tesco Value lemonade.
There is a simply frightening number of things for new mums and dads to think about, let alone finance.
And not very high up their list of priorities is what to do with the £250 the government gives to new parents in the form of a child trust fund (CTF).
Every child born after 1 September 2002 has one, which equates to more than four million children in the UK. Some of these funds will turn out to be fantastic nest eggs, useful for their offspring to get a leg up onto the housing ladder, to finance a masters, or to book the pricey round-the-world trip they’ve been whining about since they hit puberty, perhaps.
There are three different types – cash, stakeholder or shares – and new parents have a year to choose one. If they haven’t made a choice when their baby hits 12 months old, the government will sling the cash into a stakeholder CTF, chosen at random.
Even if you feel like you don’t know much about investments, it is worth taking a few minutes here and a few minutes there, as your baby’s feeding and changing schedule allows, to decide which is the best CTF to go for. Roughly speaking, for the incredibly risk averse, cash CTFs are most suitable, stakeholder is in the middle of the risk spectrum and shares is a bit more risky and adventurous.
But hold on, this is an 18-year investment isn’t it? And uh-oh look at the current interest rates on cash.
The reality is that over any consecutive 18-year period since 1899 there is a 99 per cent probability that equities will outperform cash, according to Barclays Capital research.
Yes, you may get a statement next year saying the fund has decreased in value, due to stock market volatility, but after 18 years it will almost definitely have gone up in value, and hopefully by a sizeable chunk. Indeed, data from Morningstar shows that from 1991 to 2009 cash gave a return of around 50 per cent. The FTSE All-Share index, meanwhile, rocketed by roughly 250 per cent.
Yet 20 per cent of new parents are still choosing cash, according to HM Revenue & Customs’ figures for the 2006/07 tax year. Just 6 per cent of parents are choosing shares CTFs. And 20 per cent of parents just aren’t bothering to make an active choice.
£250 isn’t a sum to be sniffed at, especially when it transforms into £500 when the child is seven, as the government tops it up with another £250.
A £500 sum can quickly grow if parents, grandparents, family and friends contribute (tax-free) to a maximum of £1,200 a year.
And it’ll grow even quicker if it’s properly invested in a diversified portfolio with a healthy slug of equities in it.
My sister didn’t know much about CTFs. She was given piles and piles of books and leaflets to read after she’d given birth. Thankfully, her husband was looking into it and after a few reminders from Auntie Ruthie it’s now invested, and not in cash. Hurrah.
It all really boils down to the government and industry stepping up to the mark and doing more to raise awareness about the importance of parents being involved with where the CTF is invested, and making use of the tax-free allowance each year.
Similarly parents need to make time to address what will likely be the largest investment they have for their precious offspring.
Ruth Emery is the deputy editor of Moneywise's sister publication Money Observer.