What Is A Child Trust Fund?

To encourage saving, and to ensure people get a good start in adult life, the Government will pay £250 in the form of a child trust fund to every baby born on or after 1st September 2002. Essentially a child trust fund is a long term savings account, where only the child can have access to the money and that only when the child turns 18. The money saved is free of tax, and tax is not deducted from any income or gains in the account.

The £250 is given to the child in the form of a voucher. It is then up to the parents to choose one of a range of types of official child trust fund accounts. Be sure to check if you are considered as a low income household, as you could receive an extra £250 for your child's trust fund. There are three main types of child trust fund account: Savings accounts, accounts that invest in shares, and a stakeholder account.

There are different types of child trust fund. A stakeholder account means the money is invested across a portfolio of companies and a share account invests the money in a portfolio of stocks and shares. These types are more risky than a savings account, as the value of a child trust fund in companies and shares can rise or fall, although over a long period of time shares tend to rise. A savings account simply adds interest to the value of the child trust fund, so while it may not have as much earning potential, it is considered the safest option.

There is no compulsory requirement for the parents to put any more money in the child trust fund, but it is recommended that parents consider making regular payments to the account as a way of getting used to saving. With many of us becoming more interested in saving money, this is a good way to get children used to managing their money at an early age.

Putting money into a child trust fund. The great thing about a child trust fund is that it can be a cost effective way to save for a child, whether it's for college fees, buying a first car or even helping towards paying for a deposit on a home of their own. Parents can also add to the original £250, and can pay in up to £1,200 per year. A good way to pay is in regular amounts each week or month by cheque, standing order or direct debit.

Child trust fund payments won't affect any benefits or tax credits you are getting, but the person who gets the child benefit for the child will be responsible for opening and managing the account. This person is known as the 'registered contact' and they will be the only person who can choose the type of account that the money is put into. The money can be transferred to a different type of child trust fund account at any time. When the child turns 16, they can take more responsibility for managing the account, so they can get used to controlling their finances as well as hopefully getting more used to saving money for important purchases.

Mark Bartley covers various consumer topics like child trust funds and other savings accounts. Keep an eye out for more reviews from Mark on savings options in the future.