Did you know this week marks the seventh anniversary of child trust funds? Check out these tips to make sure you're making the most of yours.
It's the anniversary of Child trust funds (CTFs) this week. They have now been going for seven years. If your child received one of the very first tax-free vouchers from the government, you'll be pleased to know a second top-up of £250* is on its way to you now. Hurrah!
So, with more free money just around the corner, we thought it would be a great time to have a look at how CTFs are doing - and how you can boost your child's savings now, so that it has lots of time to grow.
So, with that in mind, here's tip number 1...
1. Check the value
You can - and you should - check up on the latest value of your child's CTF on a regular basis, particularly if you're putting in extra contributions yourself. This is the only way to make sure you're happy with performance so far.
2. Top the CTF up
If you really want to make sure your child has a decent nest-egg when they reach 18 (CTFs mature on your child's 18th birthday), then try your best to keep the account well-funded. In addition to the government's contributions, you can put in an extra £1,200 a year - or £100 a month.
If you can afford to, consider investing the Child Benefit you receive for your child in their CTF. This will boost the value without it costing you a penny.
3. Switch if you're not happy
If you're not happy with how the CTF is progressing, remember you always have the right to change your mind. This is true regardless of whether you chose to put the original £250 in a cash CTF or invest it in a shares account - you can always switch.
And switching is a lot easier than you think. In fact, it can be done in much the same way as you would transfer you own ISA, for example. You can change the provider who manages the CTF on your child's behalf if you want to, or just alter the way the money is invested.
If you would like to change providers, all you need to do is sign up with the new provider. They will then let the existing provider know. Make sure you ask how long the transfer will take. There won't be any charges for transferring a CTF, although you may need to pay for dealing costs and stamp duty if the account invests in shares.
4.Think twice about cash
It probably seems like the safest option to put your child's savings in a cash CTF. But the trouble is with savings rates at historically low levels, and expected to stay that way for some time; the chances of getting a decent return from cash have narrowed.
I would only suggest you stick with cash if you're really risk averse, and the idea of taking a gamble on the stock market fills you with dread. Otherwise, shares have always been shown to generate better returns over the long term than a traditional savings account.
Of course, there's no way of way of guaranteeing that a share-based CTF will perform during its 18-year life, but I firmly believe shares offer the best prospects for long-term future growth.
According to CTF provider, F&C, a CTF which is topped up with the maximum additional contribution of £100 a month as well as £500 in free vouchers (2 x £250) could produce a fund worth a fantastic £40,175, assuming a reasonable compound growth rate of 6% over 18 years.
5. Think index-trackers
If you're new to investing, you could think about putting the CTF into an index-tracking fund. An index tracker 'tracks' the performance of the index it's based on. In other words, a FTSE 100 index-tracker, for example, invests in all the top 100 UK quoted companies. The idea is that the value of the CTF fund will match the performance of the index as closely as possible.
A tracker allows you to invest in the stock market without the responsibility of picking investments yourself. Don't forget, the FTSE 100 isn't your only option. You could go for a FTSE All-Share Index-tracker which covers more of the UK market, and invests in small and medium-sized companies as well as blue chip companies.
If you're a more experienced investor, some CTF providers will enable you to invest in other parts of the world and in different markets. Some will allow you to invest in shares directly, but this means you will be taking on more risk. Still, there is then a greater potential for reward.
6. Don't panic about short-term dips
It's the nature of the stock market to be volatile, so don't worry about temporary dips in the value of the CTF. Remember when shares prices fall, this is actually the ideal time to buy because your contributions will purchase more for the same amount than before. But when the market recovers, these extra shares will be poised to take off in value.
Remember that, although you can buy shares directly with some CTFs, many providers will offer you a range of investment funds to choose from instead. With investment funds your money will be pooled alongside other investors' cash and used to buy units in the fund. The value of the units will determine the value of the CTF.
7. Get your child involved
Finally, teach your children about the value of saving from an early age. This is a great way of promoting a responsible attitude towards their finances as they grow up. Don't forget, you have their CTF to use as an excellent example.
*Children from lower income families who qualify for full Child Tax Credit with an income below the threshold of £16,040 on the child's seventh birthday will receive £500.
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