How do child trust funds work?

You’ve had all the bumph on child trust funds, but what does it all mean and how can you use them to the max? The experts at Myeggnest.com explain the ins and outs.

Child Trust Funds are basically a government initiative to encourage parents to save for the financial futures of their children. This means that every child born after September 1st 2002 is entitled to a government supported, tax free savings account called a Child Trust Fund.  With the hope that they will have a fund available to them aged 18, to help them start out on their adult life.

So how do you get started? Well, at birth, each child receives a voucher for £250 (or £500 if the child is from a low income family) to be invested for the benefit of the child. The parents have a year from issue of the Child Trust Fund voucher to invest into one of the many registered Child Trust Fund accounts, managed by a range of providers. If the parents haven’t done this after a year, then HM Revenue & Customs will invest the money into a default stakeholder account on behalf of the child.

So is it worth doing? Yes, as in addition to the voucher at birth, there is a second voucher worth £250 (£500) once the child reaches age 7, to add to your Child Trust Fund. And further to the vouchers from HMRC, parents, family or friends can add funds into the account up to a maximum of £100 per month or £1,200 per annum. All capital gains, dividends or interest earned is tax free for the benefit of the child.

If you need further assurances then take some comfort that all Child Trust Funds are covered by the Financial Services Compensation Scheme. That means that all funds are fully covered for the first £50,000 of loss. Most Child Trust Funds will not grow to that level during their 18-year life so all savings are fully protected under the protection scheme.

Plus it has recently been calculated that a Child Trust Fund with maximum additional contributions could amass £38,000 on maturity if past market performance is used as an indicator. This would go some way to providing a cushion for further education or university costs, a house deposit or as a nest egg for future independence when the child reaches 18.
Also you can start to encourage your child to understand the value of money, as when they get older and more interested, they can help review their Child Trust Fund and can move the funds between types of investment or provider.
So what types of Child Trust Fund accounts are there? There are investment accounts to suit all tastes with simple deposit style accounts that accrue interest through to so called ‘stakeholder’ accounts that allow for investment in a range of other securities such as bonds and shares.

Comparing Child Trust Fund accounts and their relative merits is straightforward. There are comparison websites that help, such as www.myeggnest.com, a free, independent children’s saving website that helps families save for their children’s future. Here you can see the main benefits of each type of fund, how they have performed recently and also see comments/reviews from a range of contributors. Even if you are a financial markets novice, the simple descriptions and easy to follow recommendations should give you a head start.

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