What you need to know about Child Trust Funds

Child Trust Funds: What you need to know about child trust funds - at Moneyweek.co.uk - the best of the week's international financial media.

With the new Child Trust Fund (CTF) set to launch in April 2005, Gordon Brown reminded parents this week that he will soon be dishing out £250-£500 to every child born after 1 September 2002 to start their savings. Subsequently, parents will be able to pay up to £1,200 a year into the fund, until the child reaches 18, when they can access their tax-free savings, with no income tax or capital gains tax to pay. The Government will also make an additional, as yet undisclosed, payment into the fund when the child reaches seven. Parents will be free to choose how the money is invested, and a range of products will be on offer, from low-risk deposit accounts to riskier share-based investments.

So how much would the child get on reaching 18? A survey by Fidelity Investments suggests that more than two-thirds of parents would contribute with other family and friends an average of £270 per year, resulting in a lump sum of £11,000 (assuming annual returns of 6% a year). Those who could afford to top-up the Government's lump sum by the maximum £1,200 a year would increase the fund to a hefty £45,000. So far, those committed to offering CTFs include Liverpool Victoria, Norwich Union, Fidelity, Children's Mutual with Boots and Mothercare, Barclays, Family Investments and Scottish Friendly. All providers will have to offer a Government-approved stakeholder' fund, where the money initially invested in shares will gradually be transferred to lower-risk investments when the child reaches 13. Annual fees are capped at 1.5%.

One of the few companies to have so far released details of the mix of funds it is proposing is Family Investments, says Jessica Brown in The Sunday Times. The funds will be available from both Barclays and Sainsbury's Bank, and the stakeholder fund will be managed by New Star Asset Management. The initial asset mix will be 36% in UK equities, 24% in overseas shares, and 40% in cash and fixed-interest investments.

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Vouchers and an information pack will be sent to parents of eligible children from January to March, giving them 12 months to apply for a CTF with their chosen provider. If they don't do so, the Inland Revenue will open a stakeholder deposit account for the child. Either way, no one will be able to access the money, except for the child on their 18th birthday. CTF accounts will be transferable between providers at any time, although charges may be incurred if this involves share-dealing.

See www.childtrustfund.gov.uk or call 0845-302 1470