Your guide to Child Trust Funds

With the fourth anniversary of the Child Trust Fund looming, we take a look at how the original accounts have fared. And it's not good news...

If you have a child aged six or under you'll no doubt know all about the Child Trust Fund (CTF). Set up by the government to provide children born after 1 September 2002 with a tax-free lump sum when they turn 18, the accounts are kick-started with a £250 voucher from Alistair Darling himself (children from lower-income families receive an extra £250).

Fourth anniversary of CTF launch

Account holders have also been promised a similar-sized top-up to their accounts on their seventh birthday. And April 6, 2009, will mark the fourth anniversary of its launch.

Three types

More than four million children now hold a CTF of which there are three different types: a cash savings account, a stakeholder investment account and a non-stakeholder investment account. And parents and other relatives/friends can contribute up to £1,200 per year, tax free.

How have they fared?

Investing can be daunting, which probably explains why around 20% of parents plump for the cash option. And the plummeting stock market has probably made them feel glad they did.

I gave our friends at Moneyfacts a call to find out how the top 10 performing Stakeholder CTFs have done since their launch in April 2005, and you can see below that the results are not good.

Performance of Top 10 Stakeholder CTF accounts since launch

Source: Moneyfacts

The table above assumes that just the government's voucher was invested in April 2005 with no additional top-ups, so you can see how much the £250 would be worth today. All of the accounts have lost money. And these are the best buys!

Don't feel too smug

But before those who went down the cash route feel too smug, let's take a look at how the top five Cash CTF accounts have fared since their launch.

Performance of Top 5 Cash CTF Accounts since launch

Source: Moneyfacts

This again assumes just the £250 voucher was invested and no top-ups made. And you can see that while each account has made money, with the table-topper boasting interest of less than £39 in nearly 4 years, they're certainly nothing to get excited about.

Obviously the recent global financial turmoil has taken its toll on all of our investments and savings - you'll be hard pressed to find anyone that's currently better off than they were a few years ago.

Years to invest

But the good thing is that we do know the money in our children's accounts will be in there for many years - 11 years for the oldest account holders and 18 years for the youngest, in which time the stock market is likely to rise.

So if you have a CTF voucher, which route should you choose in today's tumultuous times?

Simple Index Tracker

Those wishing to invest but averse to risk could do worse than choose a simple index tracker. The F&C FTSE All Share tracker, for example, is simple to understand and boasts some of the lowest charges (1% as opposed to 1.5% as charged by other trackers).

Shares

Parents willing to take more of an interest could choose the non-Stakeholder route. The Share Centre, for example, offers investors the chance to invest their CTF voucher in individual shares, as well as make monthly top-ups.

Invest more cheaply elsewhere

However, we all know that charges eat into any investment. And with many CTF managers cheekily slapping on the maximum stakeholder annual charge of 1.5% to their fund (when you can invest in a bog-standard tracker for just 0.3%) you can see there is an argument for simply opening a cash account with your child's voucher and investing any other money for him separately. You could even consider saving into a pension for him.

Watch out for Friendlies!

As a slight warning I would also say to be wary of the "Friendly" societies listed (such as The Children's Mutual and Family Investments). They tend to load hefty charges on at the start, meaning not only can it take many years to show a profit, but this will also make you less likely to transfer to a better fund, should yours do badly (In fact, as a rule of thumb you do worse than steering clear of any financial products endorsed by a children's character!).

Verdict?

Don't panic about how bad things are at the moment - spend some time going through the options to decide which route would suit you and your child best. Remember, the stock market is likely to rise again, and drip-feeding monthly payments will mean you're buying more when prices are low.

And if you're really stuck? Open a cash CTF and put your voucher in it. At least your child will be earning interest while you decide and you can transfer it to a better option at any time!

Get a free Child Trust Fund brochure

More: How Child Trust Funds Work | Child Trust Fund website