£250 top-up for CTFs

25 August 2009

Children who turn seven this September will be the first to receive a second voucher for £250 from the government under the child trust fund (CTF) scheme.

Introduced in 2005, CTFs are a tax-efficient investment or savings vehicle designed to encourage a savings habit in the next generation. All children born on or after 1 September 2002 will qualify to receive money from the government to be invested in a CTF, with the initial payment of £250 used to open an account.

All eligible children are also set to receive a further £250 top-up voucher just after their seventh birthday – meaning those children turning seven this September will be the first the benefit.

According the CTF provider The Children’s Mutual, a fully-funded CTF could be worth as much as £37,000 when it matures.

David White, chief executive of The Children’s Mutual, says: "From 1 September, seven year olds will be receiving an additional top-up payment. It is today's seven year olds that will become the vanguard of a generation when their CTFs mature in 2020.”

The top-up voucher will be paid directly into the CTF accounts of the birthday boys and girls, meaning parents don’t have to worry about collecting or paying in the cheaques. However, experts say they should use the opportunity to review the child’s CTF arrangement and consider whether the account opened is still the best home for this ‘free’ money.

There are three types of CTFs:

* A cash-based savings account with a bank or building society. This is completely risk-free and will earn an annual rate of interest.

* A stakeholder CTF, where the money is invested in stocks and shares until the child hits 13. At this point, the CTF shifts to a lower-risk investment to lock in previous growth. The maximum charge is capped at 1.5%.

* A stocks and shares CTF account, where the money is invested in the stockmarket. The charge can be more than 1.5% but champions say the potential for returns is greater than a stakeholder equivalent.

If parents fail to open a CTF for their child within one of birth, then the government automatically pays the money into a stakeholder CTF chosen at random.

What many parents don’t realise is that they can make changes to their child’s CTF – this means they can not only move to a different provider but also change the type of CTF vehicle their money is invested in. Once they turn 16, children can start to make decisions about how their money is managed too.

Confused about picking the right CTF for your child? Download Moneywise’s free guide on investing for children

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