What should you do with your Child Trust Fund?

The Government's Child Trust Fund (CTF) is finally up and running - find out more at Moneyweek.co.uk - the best of the week's international financial media.

The Government's Child Trust Fund (CTF) is finally up and running. This means that parents with children born on or after September 2002 can expect an information pack and a CTF voucher worth £250 to land on their doormats over the coming months. The money must be paid into a registered CTF plan (there are currently 75 providers) and, if you fail to do so within 12 months, the £250 will be invested automatically by the Inland Revenue in a default fund. There are basically two types of CTF: a stakeholder scheme that is an equity-backed investment where the money will be gradually moved into lower-risk investments when the child reaches 13; and a non-stakeholder CTF, which can be anything from a cash-based savings account to a straightforward equity fund. In addition, parents will be able to save up to £1,200 a year, tax-free, in their child's CTF. If you invested the maximum amount over the entire term and averaged 7% growth a year, your child would have a fund worth £37,529 by the time he or she is 18.

This might sound like a mouthwatering amount of money, but other than taking the £250, parents should avoid this scheme "like the plague", advises William Kay in The Sunday Times. In 15 years' time, when the first 18-year-olds step forward to collect their loot, it is inconceivable that the Government will just hand it to them. As with pensions, the Government will claim that, as it has waived billions in tax, it is entitled to some say in how the money is spent, and will probably simply issue teenagers with more vouchers - this time to spend on worthy causes, such as university fees.

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