What you should do with your Child Trust Fund voucher

I am not sure I entirely approve of the child trust fund (CTF), despite Gordon Brown's extra dollop of cash for them in the budget. It's not the principle of the thing -there's nothing wrong with the idea of trying to promote equality among young adults -it's just I can't see how CTFs can possibly do that.

For starters, inequality is rarely a matter of a couple of hundred pounds (most newborns get only £250 under the scheme, which will be topped up by another £250 at the age of seven). Instead it's a matter of education - some understand how bank accounts, mortgages, credit cards and compound interest really work, others do not.

Those who do not are at serious risk of spending their entire lives struggling under the burden of unsuitable financial products sold to them by the financial-services industry. Ignorance is far more likely to ruin a life than £500 is to improve it. So I'd rather the £500 per child was not just handed over to them, but spent instead on the kind of financial education that could really make a difference.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Note that about 25% of the CTF vouchers issued have not yet been invested. My guess as to the reason? Many of the recipients are simply too financially uneducated to have a clue what to do with them.

The other point to note is that the things that give the middle classes a real advantage over the poor -access to parental savings that send them to university without ending up in debt, give them deposits for houses, help them start up businesses, and enable them to do the unpaid work experience that gets them good jobs -cost a lot more than £ 500.

My final concern with the whole system is the way it hands financial decisions to teenagers. This is probably not much of a big deal if parents never invest any more than the two £ 250 vouchers into their children's CTFs -but what if you follow the government's advice and take advantage of your right to put an extra £ 1,200 a year into the account?

This is tempting, given that all returns on the cash will be tax-free: but it comes with a hitch. Assuming you make a reasonable return on the cash and pay the minimum in charges, there could be well over £ 30,000 in the account by the time your children hit 18.

That's all money you've saved, but as soon as your children wake up on their 18th birthday they get the cash -and can do whatever they like with it.

It would be nice to think it would be used for university fees or some such, but we all know we can't take this for granted: the money is much more likely to find its way into the pockets of barmen than university coffers.

So before you start pouring your hard-earned cash into a CTF and making the fate of your savings hostage to the whims of your teenagers, it might be wise to ensure you have used up all the other tax-free ways to save first.

Isas come with similar tax advantages to CTFs, so if you aren't putting £ 7,000 into your Isa every year you should do that first -you will get the tax-free savings but hang on to control of your own money.

Still, whatever you decide to do about topping up or not topping up, you still need to invest the £ 250 vouchers -if you don't, the government will do it for you, putting the money into one of its designated default accounts, which I doubt will end up being a good thing.

So what should you do? If you do not intend to top up the fund it seems to me that, as it is a relatively small amount of money, you might as well bet it on the riskiest thing you can find and hope it works out and your child hits 18 a millionaire.

However, if you are going to top it up there are three ways to go about it. You can put the money in a cash account, a stakeholder account (a mixture of cash and shares) or a fully share-based account.

My guess is that you are best off with a share-based account, given how long the money will be invested for. But which one?

Finding the answer isn't as easy as it should be: the government website (ctfhelp.com) lists CTF providers and distributors, but there is no comprehensive list showing all the funds and their sometimes hefty charges -you have to visit all the companies' sites yourself.

So what's best? With my new daughter, Dorothy, in mind, I say F&C, which offers an excellent range of 14 cheap (with fees generally under 1% a year) investment trusts -offering exposure to everything from private equity to emerging markets as share-based options and a tracker costing only 0.7% a year for those interested in the stakeholder option.

First published in The Sunday Times (26/03/2006)