Sarah Coles looks at CTFs as the first beneficiaries approach their seventh birthday.

There’s a strange contradiction in being a parent. The days themselves can last forever, particularly when you are called upon to play four hours of peek-a-boo, or stay up for a gruelling 21-hour shift of feeding and changing nappies. But then you blink and suddenly your child is going to school and talking about university; and if you haven’t made any financial plans, your child is going to start adult life with a bucket-load of debt.

The Child Trust Fund (CTF) was brought in to combat the feeling of forever playing catch-up with your offspring’s financial needs, but how can you make the most of it, and what part do investment trusts have to play?

The government recognised the fact it’s not always easy to get around to investing for kids, so it introduced the CTF for children born after September 2002. Parents receive a voucher worth £250 (or £500 if you’re on a low income) to invest, and as of this September they started to get the top-up £250 vouchers on their seventh birthday too.

Timing your investment
On receiving the voucher, it’s up to parents how they invest. There are three choices of CTF. The first is cash. This is very much like a savings account. It is a relatively safe asset, and investors may want to choose the security of cash over the potential for growth.

There are, however, drawbacks to this approach. David White, chief executive of The Children’s Mutual, warns, ‘The issue is interest rates, which at the moment are rock bottom. Yes, you don’t have the volatility of the performance of the investment, but over a long period, and bearing in mind the point of this is to maximise the pot of money for your child, we think cash is the wrong way to go.’

Sherry-Ann Sweeting, marketing manager for Scottish Investment Trust Savings, agrees, ‘In any consecutive 18-year period since 1899, there’s a 99 per cent probability that shares will outperform cash. Time is on your side when you are investing for children.’

 The second option for a CTF investment is a stakeholder. If you fail to make a decision within a year, your voucher is automatically put into a stakeholder by the government. This invests in shares but has certain controls applied. So, for example, more complicated investments are excluded from consideration.

These funds also have to be lifestyled, so that they gradually switch into less risky investments after the child hits the age of 13, and charges are capped. This provides parents with an opportunity to take advantage of the potential growth of shares, with the comfort of certain limitations.

In practice, says James Frost, marketing manager for Witan Investment Trust, ‘Quite a lot of the stakeholders are tracker funds, tracking either the FTSE All Share or FTSE 100.’

White points out that these have their limitations. ‘Trackers are not a sophisticated investment strategy. It’s allowing people to buy into the potential growth of the market, but nothing more than that.’ Frost also warns, ‘You will often pay more for a tracker through the CTF than through other approaches.’

The third choice of CTF is a shares-based investment without the controls of a stakeholder. There are a huge variety of these, from mainstream investments like global growth investment trusts to more risky vehicles such as Far Eastern funds.

There are also CTFs run through stockbrokers, which essentially allow you to pick any share, investment trust or unit trust from the market.

Ian Benning, product development manager at The Share Centre, suggests buying direct shares is only suitable for those who are confident that they know what they are doing. ‘We have had some people who put their voucher in and made a couple of years of contributions and made a huge amount from buying and selling shares,’ he explains. ‘But on the flipside it can go horribly wrong. It depends on your confidence in share dealing.’

Collective investments, on the other hand, will spread the risk far more, and this approach ensures access to a huge range of possibilities. But whichever type of CTF parents go for, there are a few common advantages. Growth is tax free and investing is straightforward. In addition, White says, ‘It has galvanised people into action. They are contributing an average of £24 a month to the CTF, whereas before they were investing an average of £15 a month into children’s savings.’

Kate Moore, head of savings and investments for Family Investments, says, ‘It’s all about making sure that every child has a financial start in life. There are now 4.4 million children with some kind of asset by the age of 18.’

Under lock and key
However, there are a few common complaints too. No-one can get their hands on the money in the fund until the child is 18. This may not suit parents who need cash for their child as they go along.

There are also limitations on how much can be invested in the CTF. Annual investments are limited to £1,200 from family and friends, which for some people is a drop in the ocean.

The other issue is that at the age of 18 the assets in the CTF go directly to the child. Some argue that the right education will ensure 18-year-olds are ready to handle the kind of sums that can be produced by funds. They also point out that the government has now agreed to roll CTFs into individual savings accounts (ISAs), which should encourage teenagers to think twice before withdrawing the lot and spending it on a month in Ibiza. White believes that the credit crunch means that this generation is more informed about saving and investing.

 Others beg to differ, arguing that logic and rational thought are not always key factors for your average 18-year-old. In fact, they take control of managing the money when they reach the age of 16, which may worry parents who have developed highly sophisticated investment strategies for their kids and built up large assets.

Frost says, ‘If they invested the maximum each year and it grew at 5 or 6 per cent, it might be worth £40,000 at the end of the period, which is a lot to entrust to an 18-year-old.’ And Benning adds, ‘I have a 19-year-old and they are very well informed and well educated, but there are still risks.’

For this reason, some parents choose to spread their investments outside the CTF (see box). However, the CTF is still worth consideration and it’s vital to make the right choice. One protection investors have is that CTFs will be held for 18 years, so there is a good chance that the general trend will be upwards, but there are no guarantees.

That’s a wrap
Some investment trusts are available within a CTF wrapper, so parents will find Foreign and Colonial, and Witan, for example, on the government’s CTF website. However, they are all accessible through stockbroker wrappers. The Share Centre CTF, for example, enables investors to put money into one or more investment trusts alongside shares, unit trusts and open-ended investment companies. 

No one CTF will suit everyone, so it’s vital that parents get to grips with what’s on offer. However, one thing is clear. Research has shown that it tends to be mums making the decision. The majority of them are not used to investment decisions, and on average they tend to be 12 weeks into the life of their child and therefore highly harassed and sleep-deprived. 

It’s clear, therefore, that more experienced investors in the broader family may well be in a position to offer the benefit of their knowledge. Because, while not every friend and grandparent is willing to help out with the 21-hour nappy shift, this is one area where their information could prove invaluable.