Sonia Speedy, Tuesday February 19, 2008
The Child Trust Fund could help give your kids a significant financial boost - yet a new report shows that UK parents are failing to make the most of the Government-backed savings initiative. Find out how to turn your child's £250 voucher into a £20,000 nest egg
Parents of children born since 2002 are entitled to a £250 voucher to invest in a Child Trust Fund (CTF) savings account - yet many of us are letting this free money go to waste. New figures from HM Revenue and Customs (HMRC) show that a fifth of UK parents fail to invest their vouchers.
The majority of parents who do open a CTF account - some 60% - are also not making the most of these tax-free savings vehicles by failing to top them up with additional deposits, HRMC figures show. Yet a few small cash deposits over the course of a year could help create a sizable nest egg for your child.
The scheme is open to children born after September 1, 2002. The Government kick-starts the account with a £250 payment and then makes another payment when the child turns seven. Friends and family can top-up the account with as much as another £1,200 every year.
Parents can invest the voucher in either a straight cash savings account or a portfolio of stocks and shares. Where parents fail to set up an account, the Government will invest the voucher on their behalf. The fund matures when the child in question turns 18 and can access the funds.
Build a nest egg
Savings giant Nationwide claims that only 40% of parents make even the smallest deposits to their CTF accounts - but thanks to the miracle of compound interest, small sums can go a long way over the course of a child's life.
Figures from the building society show that parents who put their child's voucher into a Nationwide equity CTF account in April 2005 - when the scheme began - and supplemented it with £20 a month would now have amassed £1,028.02. And if those regular £20 contributions continue, the fund could be worth £6,789.75 by the time the child hits adulthood.
And if family and friends contribute the maximum allowance of £1,200 a year to the fund over the course of their child's first 18 years, the contributions will have helped create a fund of more than £21,000.
Get more interest on your savings
Where to find the best funds
The best rates of interest on CTF accounts are offered by building societies, according to price comparison website moneyfacts.co.uk. Leading the way is the Hanley Economic Building Society, which is offering an annual equivalent rate (AER) of 8% on its CTF account. Britannia offers 7.5% and Yorkshire 7.05% - elsewhere, if you want to stick to a big high street name, then Nationwide has a CTF account paying 6% interest.
Potentially bigger returns could be had by investing in stocks and shares accounts but this option offers a potential risk. CTFs that offer stock market investment - equity CTFs - come in two forms: stakeholder and non-stakeholder. Stakeholder CTFs have their fees capped by the Government at 1.5% per annum, but more variety is typically available down the non-stakeholder route.
Alternative ways to save
If you have additional funds, there are a number of savings accounts geared specifically for children that pay significant rates of interest - particularly if you're willing to lock your money away for a while. The 'Children's Regular Saver' accounts from Halifax pays 10% AER interest, while the Nottingham Building Society's 'Regular Saver' account pays 7.50% AER. Your money is locked for one year with either account.
If you want to access your money sooner, you can still find rates in excess of 6% on more traditional savings accounts. The West Bromwich Building Society's Star Easy Access account pays 6.55% AER and the Anglo Irish Bank is offering 6.3% on its account. Elsewhere, both Abbey and Alliance & Leicester have accounts paying 6.5% AER - but here the interest is slashed in months that see any withdrawals made.
Get more interest on your savings
More on Savings:
How to protect your savings from the taxman
Simple ways to make major savings
