Introduction of the Child Trust Fund
What is a Child Trust Fund?
The Child Trust Fund is a Government initiative aimed at:
- Helping people understand the benefits of savings and investing
- Encouraging parents and children to develop the savings habit and engage with financial institutions
- Ensuring that in future children have a financial asset at the start of adult life to invest in their future
- Building on financial education to help people make better financial choices.
Who will qualify?
All children born on or after 1st September 2002, who are eligible for child benefit and resident in the UK, will qualify for a Child Trust Fund account.
Will the Government make a contribution?
Yes. HM Revenue & Customs will provide a voucher worth £250 with which to open a Child Trust Fund account. Children from families who are eligible to receive the full tax credit qualify for a further £250 paid directly into the account later on.
Are there any tax advantages to the Child Trust Fund?
Yes. The Child Trust Fund will operate on broadly the same principle as the ISA. This means that any growth is free of income tax and capital gains tax and there is no tax to pay on withdrawal. (Tax legislation is subject to change).
What/who is the 'Registered Contact'?
Although the account belongs to the child, only a parent (if 16 or over), or someone else with parental responsibility for the child, can open a CTF account. They are called 'registered contact' for the account and have the right to 'manage' the account until the child's 16th birthday, when the child themselves can take over this responsibility.
How the voucher system will work
Will I, as the parent, be able to cash in the voucher?
No. The voucher has to be used to open a Child Trust Fund account for your child.
Do I have to apply for the Child Trust Fund voucher?
No. Your child's entitlement to a Child Trust Fund account will be automatically linked to their entitlement for child benefit.
What happens if I do not use the voucher to open a Child Trust Fund account?
Once your child's voucher has been issued you will have twelve months in which to open a Child Trust Fund account for him/her. If this isn't done, HM Revenue & Customs will open a Stakeholder Child Trust Fund account in your child's name with one of the Child Trust Fund providers. This ensures that no child misses out on this rewarding scheme.
What happens if I have misplaced my Child Trust Fund voucher?
Replacement vouchers can be obtained from HM Revenue & Customs Child Trust Fund helpline on 0845 302 1470. Lines are open between 8am and 8pm.
Where will my child's money be invested?
Providers will be able to offer you a variety of accounts, including cash deposits, unit trusts, stocks and shares and life products. Different accounts will offer differing degrees of risk. In order to qualify, providers must as a minimum offer what is called a 'Stakeholder' account, though some providers may also offer the choice of a non-Stakeholder account.
Stakeholder accounts will have to meet certain criteria and will initially include investment in stocks and shares (equities). Stakeholder accounts offer no performance guarantees nor do they confirm that such accounts are suitable for your circumstances. It is possible your child could get back less than was invested.
Sainsbury's Bank will be able to arrange for your child to hold a Stakeholder account.
How will I know I'm doing the right thing with the money?
Making investment decisions is hard. But one thing we know is that over a long period of time, such as 18 years, savings in shares have the potential to provide worthwhile returns.
However, please remember that share prices can fall as well as rise and it is possible your child could get back less than was invested.
And the Government has made things easier by asking companies that provide Child Trust Funds to have what will be called a Stakeholder account as one of their products.
These accounts will do the hard work for you:
- These will initially include some investment in shares
- But on or before your child reaches the age of 13 they can start moving the money into safer investments such as cash or fixed interest securities so that there is less risk of the value of the Child Trust Fund account falling sharply just before your childs 18th birthday.
Going the Stakeholder route means your only choice is which company - and for this you should go with one you know and trust. You can change the company that provides your Child Trust Fund at any time if you are not happy.
Stakeholder versus non Stakeholder
The Government has set down strict rules for Stakeholder accounts. For example they must start off investing primarily in shares and they can't charge you more than 1.5% annual management charge to look after your money.
But not every Child Trust Fund account will meet these criteria - some will charge more than the maximum and others will put your money into an alternative investment such as a cash savings account. While there is nothing wrong with these, Sainsbury's Bank believe Stakeholder accounts are a potentially profitable way to invest your childs money. You should remember though, that just because a 'Stakeholder' account will meet certain criteria it does not mean it is suitable for you or has a guaranteed return. It is possible your child could get back less than was invested.
Charges
What are the charges?
A Stakeholder account has annual charges of no more than 1.5% per annum of the value of the fund. Providers may also levy a charge for incidental services such as share dealing in transfer cases.
Topping-up your Child Trust Fund
How much can be paid into my child's Child Trust Fund account?
The limit is £1,200 in any subscription year (this excludes the value of the voucher in the first year). Remember, the more you invest into your child's account, the greater the financial rewards could be when they turn 18.
Who can pay into my child's Child Trust Fund account?
Your family, your friends, any person or organisation can 'top up' your child's Child Trust Fund account simply and as often as they want (subject to the investment limits).
Am I committed to regular contributions?
No. You may invest as and when you like. You can make regular contributions, ad hoc contributions or a combination of the two. You are not obliged to pay anything into the Child Trust Fund account other than the Government voucher if you don't want to.
Access to the money
Can I access the money invested into my childs Child Trust Fund account?
No. You can only deposit money into your childs Child Trust Fund account. Your child is the only one who can access the money in their account, but not until their 18th birthday.
Child Trust Fund providers
Who will provide Child Trust Fund accounts?
A range of institutions, including banks, insurance companies and Friendly Societies will provide Child Trust Fund accounts. You will receive a comprehensive information pack from the Government to help you choose a provider and decide what type of investment would best suit your child's financial needs. Sainsbury's Bank will be able to arrange a Child Trust Fund account for you through their association with Family Investments.
Once I have opened a Child Trust Fund account can I transfer it to another provider if I want to?
Yes. Your child's Child Trust Fund account can be transferred (in whole) to another provider at any time. There should be no fee for the transfer providing you transfer between Stakeholder accounts. However, providers will be allowed to charge your child's Child Trust Fund account with the costs of any share dealings necessary as part of the transfer process. You will be able to transfer your child's Child Trust Fund account as many times as you wish.
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