Child trust funds lose value: Where are your children's investments safest?
Thursday, 29 January 2009 11:05
Over four million child trust funds are now open, but recent plunges on the stock markets have made parents wary over where to invest their children's cash and some accounts are seeing a reverse in fortunes.
So how can you make the most of your child trust fund or so they have the best start at 18 to cover university fees or a deposit for a flat? Daniel Barnes looks into lost child savings.
Child trust funds are not performing well since the launch in 2005.
Every child born on or after September 1st 2002 is eligible for a child trust voucher. Those born after April 2005 received £250, while those born between 2002 and 2005 received £277 and £256 - reflecting the gains they would have received if the accounts had been open.
Children's Mutual reports £250 invested in 2002 would now be worth £239 on a stakeholder account, if no parents had not contributed.
At HSBC a £250 deposit in a stakeholder in April 2005 would now be worth £226.98.
At Britannia Building Society a £250 voucher invested on April 6th 2005 would be worth £314.62 on January 21st 2009.
Engage Mutual reports £277 invested in April 2005 and with no additional payments made to the account is valued today at £241.21.
Meanwhile, savings account child trust funds have been performing better.
With Bristol Credit Union, which began offering funds on July 1st 2007, a £250 voucher invested on that date would be worth £271.06 on December 31st 2008.
At Nationwide a savings account of £250 in April 2005 is now worth £304.06.
Stock market turmoil
Drops in the stock market have created losses for investment banks and child trust funds alike.
Over the last year the FTSE 100 has lost 30 per cent of its value - and a child trust fund invested to track the index would have followed suit.
Child trust fund providers, however, are earnest in their determination to instil in parents that their offspring's savings are for the long-term.
Tom Wilson at Halifax says: "A child trust fund is a long-term investment and, as with any long-term product, things are bound to change.
"We would expect any fund of this nature to increase over time, and parents must realise that whatever the case is now won't necessarily be the case when the child turns 18. We would definitely expect this kind of product to rebound".
"Child trust funds are long-term investments," says David White, chief executive of the Children's Mutual.
"Clearly we have seen tough times on the markets. Stock markets go down, and it can look dreadful. But it comes back stronger."
However, he says it is not time for parents to turn away from the markets.
"If not in shares where do you go? Do you go to cash which is in just one bank and rates are now low or do you invest a fund that spreads across the companies on the markets and spreads risk."
However, James Berry, chief executive of Bristol Credit Union, explains parents can switch out of shares and into a savings out and back again.
"I think parents need to think carefully about where they place their child's CTF voucher," he says.
"In a time of financial uncertainty the safety of a cash savings account has a strong attraction. And with the ability to switch between providers free of charge, parents can always invest in cash now and change later."
He adds the other benefit of a cash savings account is that there are no dealing or management charges to pay, as there may be with other types of account.
Management fees on stakeholder child trust funds are set at 1.5 per cent a year for all providers.
"Most providers have maintained child trust fund interest rates above their general savings rates, though parents need to be careful when choosing, as some providers pay an introductory bonus, or a bonus for making a certain level of top-up payments," Mr Berry explains.
Meanwhile, Mr White says parents are getting the message that child trust funds are for the long term.
"We get a lot of calls to the call centre - around 200,000 in the last year - and even a little more recently owing to investments' performance recently.
"I listen into calls, most parents get the message that in the long-term returns will come back, they are relatively philosophical."
He advised parents worried about falling returns and the health of their child trust fund to dig out old statements and see how the value had grown in recent years.
Parents' anger
One parent to dig out her daughter Ella's child trust fund statement and be annoyed was Kate Saines.
"We originally invested the £250 government money plus another £400 of money which we received from grandparents, uncles and aunts as presents when Ella was born into the F&C Child Trust Fund, which invests mainly in Asian/Pacific assets.
"We did search the market but opted for quite a "risky" investment in the end because a child trust fund is a 18-year plan and we are aware that your investments are likely to increase over the term."
However, the investment has fallen by quite a significant sum in only six months after it was opened, Kate explains
"It is disheartening to think that some of the money given to Ella as a gift on her birth has now effectively disappeared and we are quite disappointed," she says.
"However, we have to keep in mind that it's a long-term investment and, eventually, Ella will have a nice little nest egg to start off her adult life.
Where to invest?
"It is a revolution in saving for kids. Before Child Trust Funds one in five parents were saving for their children now people are saving an average of 24 a month," said Wendy Roberts at Children's Mutual.
Parents are presented with a child trust fund voucher worth 250 on the birth of their child, with a further 250 for low-income families.
Some 79 per cent of parents invest in shares with their child trust funds through a stakeholder account.
Further payments from the government are made when the child turns seven and parents, relations and friends can put up to 1,200 a year into the funds which mature when the child turns 18.
There are around 50 child trust fund providers ranging from building societies, credit unions, banks and some major investment providers and if one provider lets you done you can switch.
A full list is available here from www.childtrustfund.co.uk
Parents have a series of options for their children's funds including savings accounts, bonds or those that invest in low-risk stocks and shares, as well as ethical and Sharia compliant accounts.
Can child trust funds beat economic challenges
Parents worried that a stock market crash in ten years' time could wipe out even more from their children's funds need not worry.
As with pensions - that should move to lower risk investments as someone heads to retirement - investments in a child trust fund is 'lifestyled'.
This means after a child's 13th birthday, with a stakeholder fund, the investment is moved into safer investments such as bonds.
Children's Mutual claims the long-term nature of the funds means they have the time to ride out crisis.
Analysis of an hypothetical child trust fund started in 1990 - with £250 from the government and £250 on the seventh birthday - and maturing in December 2008 after tracking the FTSE All Share Index shows if parents had invested £10 a month in the fund - a total of £2,160 - it would be worth £5,089.
If the average of £24 a month was invested, a total of £5,184 - the fund would mature with £10,318.
"And this is with the three big economic challenges of the last 18 years," says Mr White.
This compares with a maturing savings account child trust fund of £3,924 if £10 a month was invested and £8,157 if £24 was invested.
Carry on saving
Some 50 per cent of parents at Children Mutual have opened direct debits to pay into accounts and 80 per cent add ad hoc payments.
Regular monthly contributions into child trust funds now amount to £12.6 million per month, according to data from the Tax Incentivised Savings Association (TISA).
Monthly direct debit contributions now average £22.10.
"We see payments go through the roof in January as Christmas cheques come in," said Mr White.
However, across the industry only about 30 per cent of parents make regular payments to their progeny's fund.
Neil Armitage of the Foresters Friendly Society said: "Building up savings can be an easy habit to break when times are hard but one which is hard to return to once confidence in the economy picks up.
"Setting aside an affordable amount on a monthly basis now could make all the difference in the future."
Kate Saines maintains the future of her child's saving will make a difference.
"What Ella will spend it on is a matter of contention in our household. Tom thinks she should put it into savings, use it to help her pay her way through university or use it as a deposit for a house," she says.
"I am more realistic and know that she will desperately want to blow it on a big all-expenses-paid holiday to Ibiza with her friends or perhaps go on a shopping spree down Bond Street.
"However, I hope we will be able to teach Ella, as she grows up, the value of her investment and encourage her to use it wisely when she is 18.
"Eventually it will give her a bit more independence, which ever way she spends it."
Daniel Barnes. Additional reporting: John Ellul
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