Much like an ISA for children, Child Trust Funds (CTFs) are a tax-free way to grow savings or investments, up until your child turns 18. They are available to all UK-resident children born on or after 1 September 2002 and for whom Child Benefit is received.

When an eligible child is born, a £250 CTF voucher is sent to the Child Benefit claimant (normally the parent). The parent or guardian can then use these vouchers to open a CTF account.

If your family is lower-income and claims Child Tax Credit, you will get another £250, for a total of £500 per eligible child. It is likely you will also receive the same amount again when the child turns seven.

How to grow your Child Trust Fund

Once the Child Trust Fund is opened it can be added to by family, friends and the child him or herself. Up to £1,200 each year can be contributed (not per person; this is cumulative). As long as this limit is observed, any income and gains that come from this trust will not be taxed, but the money must not be withdrawn until the child's 18th birthday. At that point the money will belong to the child, and he or she can use it as he or she pleases.

Three types of Child Trust Fund

In most cases, the child’s parent or guardian chooses which type of Child Trust Fund to open. There are three basic types:

• A savings account which pays out tax-free interest.
• A shares account which allows you to buy shares in individual companies.
• A stakeholder account which invests in a fund that buys shares in a range of companies. This type of CTF minimises risk as time goes by: once the child turns thirteen, this money is slowly moved into lower-risk investments, and by the time the child turns eighteen the money is all in cash. This is done in order to avoid a stock-market crash in the last five years of the account. If you choose this type of CTF, you should note that the limit for charges on the account is 1.5% annually, and the minimum additional contribution is £10.

The decision you make when setting up a CTF is not binding: you can change CTF accounts at any time, although in the case of stakeholder and shares accounts there may be costs for doing so.

Which type of Child Trust Fund is best?

The savings option is the most popular, it is clearest: you know what rate you will get and the fund is just about guaranteed to grow slowly and steadily over the 18 year period. The stock market options are much more likely to result in better returns, but with them they carry more risk and greater responsibility to manage the fund.

If you favour the risk and return of investing, but are not confident you have the knowledge to navigate the market on your own, consider opting for the stakeholder – it’s essentially an index tracker, which is a sound and relatively low-risk investment vehicle.

One final note

If you want to exercise control over which type of CTF is opened for your child, it is critical that you make this choice and open the account within twelve months of receiving the voucher. If you fail to do this, Revenue & Customs will automatically open a stakeholder account for your child. As mentioned, you are always free to move this account to another provider, but to save yourself the trouble, be sure to open the account in that first year.

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