Where should I invest my child’s Child Trust Fund (CTF) to get a better return?

 Reader’s Question:

I have just received a letter from the child trust fund saying that a voucher they issued for my child at the time of birth for £250 was not invested , so they are obliged to invest it on my behalf. Having done that ,what are your recommendations for me so that I can ensure that the trust fund they have opened on my behalf is going to be the best option for my child’s future, as it is their money?

My response:

Just to fill in the gaps for other readers:

If a child was born between 1st September 2002 and 2 January 2011 and is eligible for child benefit the parent would have received a £250 voucher to invest into a Child Trust Fund (CTF). A Child Trust Fund (CTF) is a long-term savings and investment account from which the money cannot be withdrawn until the child is 18 – unless they are terminally ill. All interest/gains are tax free and you can invest up to £1,200 a year into it, via cash or investment funds.

There are a range of different types Child Trust Funds which parents can invest in, be it a Savings account, Share account or Stakeholder account (here is link giving full details of the different types of stakeholder accounts),

However, if you don’t open a CTF account before the expiry date on the voucher, HMRC will open one for you. This will be a Stakeholder account.

HMRC will then write to whoever gets Child Benefit for the child telling them where the account is held. They will also let you know that someone with parental responsibility will need to become the registered contact for the account. If you become the registered contact, you can change the account to another type of account or provider at any time.

So this is the stage where you are at the moment. As the account which  HMRC have opened for your child is a stakeholder account you at least know it is subject to reasonably low charges – which is a positive. But as for what Child Trust Fund is best for you and your child's future then that is a personal decision.

Below is some official guidance on how to chose a Child Trust Fund account:

How to decide which type of CTF account is right for you

The type of CTF account you want may depend on whether you:

• want the best chance for the money to grow - this is called a 'return'
• are prepared to get back less money than you have put in - this is called a 'risk'

Putting money (or 'investing') into shares can be risky – as you may not get back what you put in. But over time, the account may grow more than one that doesn't invest in shares. So you need to think about how happy you would be to invest in shares.

This table may help you decide which type of account to choose.

How do you feel about investing in shares?	How much risk do you want to take with the money?	Type of account best suited
You're happy to invest in shares	You're happy to take a high risk if it means your child might get more money at age 18	A shares accountA stakeholder account
You’re a little unsure about shares	You're happy to take some risk if it  means your child might get more money at age 18	A stakeholder account
You don't want to invest in shares	You don’t want to take any risk even if it means your child might get less money at age 18	A savings account

 

If you’re still unsure what type of account to choose, you can get help from any Child Trust Fund provider (here is a full list of Child Trust Fund Providers) or an independent financial adviser.

An uninspiring choice

But one thing I will add is that if you are interested in a shares account (i.e. a CTF with the scope to invest in investment funds) then your choice of provider is extremely limited, especially if you want a range of funds. Historically, Childrens Mutual and F&C provided the largest fund choice, but even then it was a choice between 8-10 fairly poor funds. (For what to look for in an investment fund read my article 12 things to look for when choosing an investment fund).

Let’s be honest, investment houses aren’t really interested in Child Trust Funds. Yes they provided easy money for them to mop up when the government was chucking around £250 vouchers but most parents never contribute into CTF’s themselves. So like any business, the investment houses fish where the fish are and offer innovative and attractive products to catch the eye of other more profitable types of client.

The new Junior ISA

The problem has been compounded by the replacement of CTFs with the new Junior ISA . Investment houses view CTFs as a dead market so have no incentive to offer decent savings rates or investment funds. This is highlighted by a number CTF providers starting to restrict the range of investment funds offered on their existing share account CTFs (F&C being one of them).

So I suppose what I am saying is that you do have a choice of what you want to so your child’s CTF (i.e move it) but its a very limited and uninspiring one.

Join the protest for better returns

The problem is compounded by the fact that those with a child trust fund will be not entitled to the new Junior ISA, where the best rates and fund managers are likely to be on offer. The Daily Mail recently stated that ‘’ investment experts fear that the £2bn still in [CTF] funds could be condemned to years of poor returns.’’ The Daily Mail has now thrown its weight behind a campaign to merge Child Trust Funds and Junior ISAs which I applaud.

I hope that helps and good luck

Best Wishes

Damien

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