Money Mensch: Your guide to Child Trust Funds
This is an urgent call to parents whose children have money in a Child Trust Fund. Act now to ensure they get a decent return.Unsurprisingly, the flagship Labour scheme to give free cash to every UK child, poor or rich, was scythed down as part of George Osborne's mammoth spending cull. Yet confusion is now rife as to how it will work going forward.
So here's a Q&A to ensure you know exactly what to do.
● What are Child Trust Funds (CTFs)?
They are tax-free wrappers for you to save or invest for your child in which you can put up to £1,200 a year. The big boon is that the state also adds a £250 voucher - or £500 for families on low incomes - when a child is born, and again when the child reaches seven. That means each child gets free cash of between £500 and £1,000. Of course, that is all about to change.
● Why was it introduced?
Labour's aim was a touch of social engineering. The idea was to teach children some financial responsibility and independence, as well as promote a "college savings fund", just as they have done in the USA.
I've never been that much of a fan of the structure of the system. The main problem is that on a child's 18th birthday, they gain full responsibility for the cash, which actually risks leaving parents in a difficult position.
While it sounds harsh, when looking at an adorable baby wrapped in swaddling cloth, who knows whether your child will be a socially and fiscally responsible 18-year-old. Understandably, such concerns have put many parents off and they have just used their own tax-free ISA allowance as an alternative.
● When will it be scrapped?
From August 1, the government will stop all free cash payments to all seven-year-olds and, at the same time, slash payments for newborns to £50, or £100 for low earners. Then all free money stops from January 1 2011.
● What happens to existing Child Trust funds?
There's no change. The government will still to allow people to put save up to £1,200 a year, tax-free, each year. Money that has already been put into Child Trust Funds can stay there earning money tax-free.
● What about rates?
My suspicion is that rates will plummet, as there will be very little need for providers to compete for business.
So, from now on, if your children have money in Child Trust Funds, it will be worth keeping a close eye on it to be sure the rate is decent.
If all rates were to plummet, you'd be stuck. You cannot withdraw money once it's in a CTF. It belongs to your child and must stay there until they are 18.
● How do I get the best rate?
Transfer the cash to a better payer. To do that, just pick a new provider and ask it to move the money across for you. The current top payer is the Yorkshire Building Society, which pays 3 per cent AER and includes a year-long 0.7 per cent bonus. It can be opened in branches or by phone.
The next top payer is the Chorley BS, which pays 2.9 per cent AER and the account can be opened by post - after downloading an application form from its website - or in branches.
● What if you have an unused voucher?
If you've got a newborn and have just received a voucher, the most important thing is that you put the money somewhere quickly. If you don't, it's not earning interest.
● What about investment Child Trust Funds?
The other option with a CTF is to put it in investment rather than savings products. In other words, how it performs relates to how stocks and shares the investment is based on do. As long as you are prepared to take a risk that the cash may shrink - in the hope it will grow more quickly - there's nothing wrong with this option. Over 18 years, you'd typically expect the stock market to out-perform savings accounts, but there's no guarantee.