Alternatives to Child Trust Funds
By Kate Saines
It came as no surprise when the coalition government announced the scrapping of the Child Trust Fund (CTF) scheme.
Both the Liberal Democrats and Conservatives had threatened to axe the initiative- albeit in different degrees - during their election campaigns.
And the programme was not without its critics.
But while few can argue against ditching the voucher when the country is trying desperately to claw its way out of debt, the real blow has come from the loss of the scheme's benefits.
One of the attractions of CTFs is that they are tax-free, meaning up to £1,200 can be put away each year without incurring a levy on the interest.
They also provide an incentive for families and children to save and learn more about investment.
The Tax Incentivised Savings Association (Tisa) said it would continue to persuade the Treasury to introduce a savings scheme, with tax advantages, which encouraged parents to build a financial nest egg for the their child.
But until such a replacement is introduced parents keen to impress upon their children the benefits of saving must look at different routes.
Investment Plans
Many of the CTF providers have child investment plans which allow parents to put money into a trust account to earn returns over a long period.
F&C, for example, has just such a product which allows parents to buy investments through a bare trust.
Jason Hollands of F&C says: "These carry certain advantages over CTFs in that there is no cap on the amount you can invest, there is more control over when the child gets access to the funds and they can be tax efficient."
The company's Children's Investment Plan utilises these options, says Mr Hollands.
Meanwhile, investment adviser, The Share Centre, offers a Junior Investment Account. This vehicle, like F&C's product, has no limits on how much can be invested and offers flexibility on when and where families choose to invest.
Money can be invested in stocks, shares, funds, bonds and even exchange traded funds (ETFs). By choosing the designated account parents take control of the investment until they feel they are ready to pass it on to the child.
A bare trust, meanwhile, is handed over to the child on their 18th birthday after being held in trust until that date.
The Children's Mutual offers its Youngster Bond Extra which invests in the provider's with-profits fund. And Family Investments, another major player in the CTF arena, has a Children's Unit Trust.
If you are adamant that you want a long-term high-returning investment for your child there are many providers out there offering similar products.
Children's Savings Accounts
A little less risky than putting your child's money into shares, bonds or other serious investment vehicles are savings accounts.
Whilst offering a place to put any birthday cheques from Auntie Mavis or a haven for excess pocket money their straightforward nature means children will also learn how to deposit cash, can see their investment build and even earn some interest.
The problem is, like many savings products in the UK at the moment, the children's versions have not escaped the curse of low interest rates.
Research by independent financial research firm Defaqto found, in April, interest rates on these accounts varied greatly from 0.05 per cent up to six per cent.
The average child's savings account was paying a gross rate of 1.13 per cent interest which meant a child with £100 in their account would only earn £1.13 per year.
However, Defaqto, says this should not put parents off opening an account. David Black, the firm's banking specialist, says: "It is important to get youngsters into the habit of saving and for many this will involve visits to the local bank or building society."
And there was even some good news. "There are a wide variety of different children's savings accounts available with some that offer free gifts," he says.
However, interest rates are the real key to these accounts and often products with free gifts don't always offer the most alluring rate.
At the six per cent interest end of the scale is the Children's Regular Saver from Halifax. The monthly savings account, highlighted by Defaqto, requires a minimum of £10 to be deposited per month for a year. Deposits must not exceed £100.
Bath Building Society is offering five per cent on its Future Builder account for under-18s. Just £1 is needed to open the account, it allows instant access to cash but the interest rate plummets to 1.10 per cent for balances of £500 or more.
Principality Building Society's Dylan's Regular Saver has an interest rate of 4.5 per cent but again is only available for one year and requires monthly deposits of between £10 and £150.
And Northern Rock currently pays interest of three per cent on its Little Rock Instant Access Account, which is an under-16 account that does not restrict savers to just a year. Customers need a minimum deposit of £1 to start saving.
Watch out for accounts which are only available to certain age groups, seven to 17 year olds for example, which are not much good if you are looking for a place to start saving for your newborn.
Many of the best rates, as our examples above show, are for short-term savings accounts or fixed-term bonds which do not offer a long-term home for your child's finances.
Tax-wise, children do not usually have to pay the levy on their savings. However, most banks and building societies will need you to fill out an R85 from to ensure your child receives their interest tax-free.
Government-backed products
National Savings and Investments (NS&I) currently offers Children's Bonus Bonds which provide tax-free interest. New versions of these are issued regularly offering different returns and they allow under-16s to invest between £25 and £3,000.
NS&I also allows children to invest in its index-linked savings certificates, which are three or five-year investments offering interest rates which guarantee to beat inflation. The tax-free products stipulate that children under seven must get an adult to purchase certificates for them.
And what about good old fashioned Premium Bonds? Although no interest is paid, the prizes are tax-free and they provide a good way for relatives to make financial gifts to young children.
Making the most of your CTF
If your child already has a child trust fund, the good news is it is safe. And many of the CTF providers have been coming out in force since the news of the scheme's abolition to reassure customers that established products will continue to be run in the same way.
Indeed, if you have a baby before August 1st they will still be eligible for the £250 voucher. After this date they will receive £50 until January 2011 when the entire scheme will be abolished.
Provider, The Children's Mutual, is encouraging parents to make the most of these investments if you remain lucky enough to benefit.
"We urge families not to be disheartened by the government's announcement but to continue to help their children fulfil their future potential by saving regularly over the long term," says David White, chief executive of The Children's Mutual.
He adds: "CFT-holding children now hold a unique asset that others will not."
Moneynet.co.uk calculates that by saving £22.50 a month on top of the two £250 payments from the state (the second being paid to children at seven, but which is being scrapped in August) a CTF with a modest growth of four per cent would be worth £7,964.70 by the child's 18th birthday.
"If the CTF had been introduced in 1992, those with a CTF maturing this year would be able use their lump sum to offset the rising cost of higher education or even put it towards that now seemingly impossible deposit required for their first home," says Moneynet's Andrew Hagger.
But if your child will not be eligible for a CTF, do not despair.
A survey by F&C found the free money aspect of CTF was not the biggest factor when investing for children. It seems families just want to create a good financial future for their sons and daughters.
A large 74% of the 2,000 surveyed named bank and building society accounts as the most popular non-CTF choice with 68% admit they already used such a product.
However, only seven per cent say they would opt for the high risk investment route of using an investment trust or an OEIC.
There is also plenty of evidence around which shows inflows into CTFs have not been as high as expected and many parents fail even to invest their £250 voucher.
With this in mind, and with so many other savings options, perhaps the mourning of the CTF will be more short-lived than we think.
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