Following on from a successful application for Child Benefit, parents automatically receive a £250 voucher for the Child Trust Fund, which the parent has to use to set up a Child Trust Fund account - it can't be cashed in.
When your child is age seven, a further £250 will be credited to their account - so that's £500 from the government.
If you are on a low income, then the figures double. You still receive the £250 voucher at outset, but the government credit an additional £250 to the account on your behalf, and when your child reaches age seven, they’ll pay in £500 - so that's £1,000 in total. You don't have to claim for this as the government works out whether you are eligible or not dependant on Child Tax Credits.
Are there any restrictions about how much can be added?
Because the Child Trust Fund has tax benefits, like an ISA or pension, there's a limit of £1,200 that can be paid in during any year. A CTF year runs from the child's birthday to birthday. You will be sent an annual statement a few weeks prior to your child's birthday so you can see if there's still room to pay more into the account.
Another advantage of the CTF is that anyone can pay into it, so you might want to think about donations from family and friends.
What is a stakeholder fund and are there benefits over cash only schemes?
Parents need to choose what type of account they feel best suits them. One type of account for CTFs is the stakeholder account, which invests in shares. From your child's 13th birthday, however, the investment will start to move from shares to lower risk investments to help protect the savings towards the end of the investment period.
The stakeholder account also has low charges set by the government and allows you to top up from just £10, which other CTF accounts may not. In fact, if you don't set the account up for your child before the voucher expires, the government will place it in a stakeholder account for you. Of course, because the account invests in shares its value can fall as well as rise and your child could get back less than was paid in.
Parents who follow investments such as shares may prefer to invest in an equity (or non-stakeholder) account. These accounts also invest in stocks and shares, but may offer wider access to more specialist fund types. So they may offer the chance of a greater return than stakeholder or cash accounts; although this means that there is a greater risk to the investment. Because these accounts do not have to meet the government’s stakeholder conditions, charges and minimum contributions can vary.
Cash-based CTF accounts tend to be offered by building societies. These may be suitable for cautious parents who don't want to take any risk with the money as the money is protected. But be aware, by eliminating all risk and opting for cash, you may reduce the end value of the fund (for example, £20 won’t buy as much today as it would 10 years ago). Also, the introductory bonuses offered by many building societies will fall away after a year or two, and then the rate will drop.
What is a child likely to get at 18 if parents paid in all their child benefit?
Child Benefit is currently worth £18.80 per week* for the first child and some parents with a high disposable income might prefer to invest this into their child's CTF account.
If that amount was regularly placed in a stakeholder account over a full 18 year term and grew at an assumed 6.75% per annum after charges, then your child's fund could be worth just over £29,000**.
* Source: www.direct.gov.uk. Amount as at 2008-2009.
** The figure above allows for a £250 government payment at outset and then again at age 7. It assumes that investments grow at 6.75% per year over a full 18 year term with contributions starting at age 0 and with an annual charge of 1.5%. These figures are not a reliable indicator of future performance, they are not guaranteed, and their future buying power would be affected by inflation. This account invests in shares so its value can fall as well as rise. Your child may receive back less than was paid in.
Source: http://www.ArticlePros.com/author.php?Family Investments
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