Martin Lewis is a TV presenter and journalist, as well as being the UK's only professional money saving expert. From his website moneysavingexpert.com he provides unbiased advice how to make the most from your money. Here he gives iVillage the low-down on Child Trust Funds
It's slightly more spin than bonanza, but finally the vouchers for the government's Child Trust Fund (CTF) contribution have arrived. All babies born after 1 September 2002 are entitled to a lump sum that will be locked away until their 18th birthday. So how can you insure they get the best possible returns on their money?
Those with household incomes over £13,480 get a £250 voucher per eligible child (plus interest for babies born before April 2005) and those earning less, £500. More cash is due when kids reach seven, but the amount hasn't been decided yet.
Can money be added to the Government's contribution?
You can add a total of up to £1,200 a 'year' to the Government contribution. The year starts on the child's birthday (apart from the scheme's first year, when it starts at account opening and ends the day before your child's birthday).
All savings put into CTFs are free from both income and capital gains tax although technically, inheritance tax rules do apply, but unless it's large gift from a grandparent, this is likely to be irrelevant.
Who opens the Fund?
Parents of qualifying children should have received a voucher and information pack. Those with new babies should receive them soon after the birth.
The choice and ongoing control of the investment belongs with whoever has parental responsibility, and passes to the child itself at the age of 16.
Is it worth adding to the CTF?
On the surface this is a tax-efficient scheme, so it's a good idea. Yet it has two major drawbacks.
- The money goes direct to your child. Babes in arms now can grow to be rebellious 18-year-olds. The CTF goes straight to them. Your savings for their college fund may be spent in a day on a Playstation, world trip or some darker purpose. It is their money, you can't stop them
- This scheme comes from a political agenda and opinions change. It's unlikely any party would be brave enough to reclaim the cash, but the rules and regulations could morph over 18 years
The CTF is a useful place to stash some cash, but it's probably best not to dunk it all in there.
Can the money be withdrawn?
No. It stays until your son or daughter reaches 18. The only exception is an unpleasant thought. If a child dies before 18, the money automatically goes to the parents or guardian. Provisions are also possible to release the money early for terminally ill children.
Choosing the right CTF type
Do you want to save or to invest for your child's future?
Saving means you're guaranteed to get back what you put in, plus interest. Investing means risking money in a stock market linked product in the hope of better returns, but the possibility you won't get back what you started with.
Conventional wisdom argues that over most 18 year periods stock markets outperform savings accounts, as there's time for market vagaries to cancel each other out. Yet it's still not risk free. Just ask anyone who suffered abysmally performing pension or endowment funds.
There is no right answer. The choice is down to your priorities. Get extra advice and information on the top paying accounts and working out the best investment.
Martin Lewis on iVillage!
TV presenter and journalist Martin Lewis is the UK's only professional money saving expert. For a complete version of this article and many more money-saving tips, visit the moneysavingexpert.com.
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