Money priorities change when children arrive. Out goes care-free spending, to be replaced by a focus on protection, and providing for your children’s future – whether that means funding education, a first home or a chance to travel.

The Child Trust Fund (CTF) is the obvious vehicle for building a nest egg, but for parents with a longer-term view, a self-invested personal pension (SIPP) opens up a world of possibilities.

Starting with CTFs
A Child Trust Fund is a good place to start when thinking about children’s investments. This product, essentially an individual savings account (ISA) for kids, is a Gordon Brown brainchild that’s destined to be the long-term legacy of his years as Chancellor of the Exchequer.

CTFs are a compulsory savings vehicle for children born after September 2002. Every child born after this date has a CTF somewhere. There is no tax relief on contributions to these funds, but the scheme is tax efficient.

You pay no extra income tax on the dividends and no capital gains tax on asset growth. The various types of CTFs available range from a simple cash account to a market-linked stakeholder product or a fully managed self-select account.

The last two provide the greater scope for growth. The stakeholder, for instance, can be used by more passive investors, while still benefiting from the strength in the stock market. The self-select offers superior capacity for selection and portfolio maintenance, giving the holder control over what, and when, to buy and sell.

Topping up the CTF
However, what is often overlooked about the Child Trust Fund system is that, while the Government gets you started with a £250 voucher (or £500 for lower income homes), you can also put away up to £1,200 each year into the fund until the child is 18. The child takes control at 16, but cannot remove funds for another two years.

A CTF can grow into a tidy sum. The full amount invested each year for 18 years at a seven per cent growth rate could be worth some £45,000 at maturity. That is enough to give a child a financially healthy start in life.

And indeed these investments can now be for life. Before he left the Treasury, Ed Balls extended the rules governing ISAs, with the result that the Child Trust Fund can be rolled over into this form of tax efficient, long-term savings plan on maturity. This creates the potential for the investment portfolio created in childhood to help meet the child’s needs throughout adult life.

However, though CTFs can undoubtedly be a good product, there are alternatives. And it’s particularly important to consider these alternatives for kids who missed out on CTFs by being born too early. It might also be a consideration for parents who question the wisdom of their children being able to spend the money as they wish when they reach their 18th birthday.

So what are the alternatives to CTFs? Leaving to one side the long- established maintenance and discretionary trust funds, child SIPPs are a great alternative. A key attraction is that, since the cash can’t be spent until retirement, parents need not worry about youthful spending indulgences.

While your child may not thank you for it – in your lifetime, at least – the product has the potential to change the financial fortunes of future generations. Far more than the National Lottery, child SIPPs could well create an entire generation of millionaires.

Pension contributions of up to £3,600 per year can be made into a SIPP, without the need to prove earnings. Since the SIPP enjoys tax relief on contributions, this means that where you pay £2,800, the Government pays the rest – a major advantage over the CTF.

Were a parent to contribute this amount every year for 18 years, assuming seven per cent growth, a SIPP could be worth £130,000 by the time their child reaches 18.

That’s pretty good, but if that fund was left to grow until retirement at 60 (and we continue to assume 7 per cent growth), the final sum would be worth around £2.2 million. Of course, you have to allow for inflation, but unless it’s close to that growth rate for the whole of the period, this still represents a substantial nest egg that could change the way future generations think about retirement.

Starting small
The key here for parents is that a little bit put away early is better than a lot put away in later life. And the security that this level of comfort can provide could change the way the next generation approaches its finances.

The knowledge that we’ll be provided-for in retirement changes our life choices in our 20s, 30s, 40s and 50s. Indeed, research conducted by Selftrade has shown that, armed with this sense of financial security about the future, more than one in three of us would feel more relaxed about our careers and 35 per cent would feel more able to live their lives ‘for the moment’. In fact, one in four parents said they would have liked to have given their children a better start in life, had they not had to worry about their own financial future.

If today’s parents were able to break the mould and start putting money away for their children – even if it’s a relatively small amount – those kids might not have to face the same financial constraints in adult life.

Understanding your investments

Such growth is possible because of the wonders of compound interest, and the fact that shares have historically outperformed cash, bonds and even property over the longer term. And the beauty of the SIPP is the range of permitted investments.

Exposure to stock market returns can be achieved by building a portfolio of UK and international shares, but this is not the only choice. Unit Trusts and OEICs are very popular investments, which offer the benefit of professional managers specialising in a variety of sectors.

For those wishing to track world sectors and indices, exchange-traded funds (ETFs) are one of the most effective and efficient methods, with a rapidly increasing range. Bonds can also be an important part of a pension portfolio, providing stability and income; while for those seeking leverage, more specialist products such as covered warrants can add some spice.

However, two key factors to take into consideration when selecting investments is the nature of the instrument you’re investing in, and the potential risks involved. You need to assess why you are investing, the time frame over which you’ll be putting money away, what you want to achieve, and your attitude to risk. It’s also important to diversify your investments, so that exposure isn’t to a single asset class or sector. With this in mind, it’s sensible to make use of the full range of collective investments, such as unit trusts, OEICs, investment trusts, or ETFs, which allow you to buy instant diversification.

Trying out your ideas
At a time when it’s increasingly important to plan ahead for your children’s financial needs, the internet is firmly shaping many aspects of modern life. The world of personal finance is also being driven by this boom, and the next ten years will be an interesting time for developments in online sharedealing and investing.

This will be a particular boon to investors seeking more control over their portfolios, including those parents looking to make this type of long-term saving on behalf of their children.

For example, if you want to try out investment ideas first, several brokers, including Selftrade, offer a ‘watchlist’ function that allows you to build a ‘fantasy portfolio’ before you commit any actual money to the market. It’s a useful exercise that can improve investment confidence and selection skills.

Making investment choices need not be daunting. The wide range available means there’s an instrument suitable for every investor’s needs, and self-directed investors can also draw support from their broker. Selftrade offers data, prices, news, charting and research tools, and publications, which all help clients in their investment selection and portfolio maintenance. Whether you’re a novice or an experienced investor, active or passive, there have rarely been greater opportunities to provide for your children’s financial future.

Stephen Barber is head of research at Selftrade