Who will provide the CTF accounts?
The Government will announce details of the providers in the New Year but it has approved a range of banks, building societies, insurance companies and investment houses to run CTF accounts.
The information pack will give pointers on how to choose a provider and decide what type of investment would suit your circumstances best.
Where will the money be invested?
Providers will be able to offer a variety of accounts such as a savings account, an account that invests in shares in companies, or a 'stakeholder account'.
What are the differences between these accounts?
With a savings account, any money you invest is secure. For example, if you invest 500, your child will get that sum of money back as well as earning some interest. Although your money earns interest, it might not grow as much as it would if it was invested in shares.
Investing in shares is more risky, as they can lose value if companies are not performing well. In the past, an amount of money left for a long time in this type of account has grown more than the same sum in a savings account. But, as we often hear, shares can go down as well as up and past performance is not a guarantee of future performance.
The charge on this type of investment account is usually a percentage of its value. Check how much this would be with your chosen CTF provider.
What is a stakeholder CTF account?
The Government has made rules for these accounts to reduce the risk. They work on the lines of the old adage, 'don't put all your eggs in one basket'. Your child's money is invested in a number of companies. Once he or she turns 13, the money starts to be moved to lower-risk investments or assets. This means it is protected from stock market losses as the child nears his or her 18th birthday.
Charges for managing stakeholder accounts will be no more than 1.5 per cent a year and will be designed to allow for payments of as little as 10 to be made at any time.
What is to stop my child taking the money out and spending it all on sweets?
Even though the account is in the child's name, the parent or guardian looks after and administers the account for them. The money, including the government contribution and anything the family pays in, is locked away so your child cannot actually get his or her hands on it until the age of 18.
Arrangements have been made so in the case of terminally ill children, the money can be withdrawn.
What happens to the money when my child turns 18?
There is no restriction on how the money is spent, although the idea is that it will be used to help set up a home or a business, for training or education. If the young adult chooses not to use the money it may be able to be rolled over into tax-effective savings schemes available at that time.
Will the Child Trust Fund be taxable?
No. Your child will not pay income or capital gains tax on their Child Trust Fund savings and investments. But those paying in to Child Trust Funds will not receive tax relief on their contributions.
Is it worth making additional contributions?
Yes. According to the Children's Mutual, if a CTF was maturing now which had not had the benefit of additional family contributions, a 250 initial investment in shares would have grown over the 18 years to 1,000, which would be unlikely to even cover a set of driving lessons.
However, over the past 18 years - which admittedly have seen high interest rates and inflation - with a contribution of 100 a month, a CTF could have grown to between 30,000 and nearly 43,000.
