Baby shambles

By Sarah Modlock

1 November 2005

You don't often get handed money for nothing, especially by the government. So it's hardly surprising that when the Child Trust Fund voucher first started dropping through letterboxes this Spring, parents examined them carefully, looking for strings attached. But months later, a million vouchers - more than half of those issued - still haven't been invested.

The only catch - if you can call it that - is that you have to invest the money in a special account and many people feel confused about which is best. It's not just a choice between more than 70 different account providers. A decision must be made about whether you put the money into a cash, shares or stakeholder account. This involves looking at different levels of risk and benefits.

What the accounts have in common is that they are tax-free, long-term investments designed to help the money grow and can only be touched by the child when they are 18 years old.

Put simply, cash savings accounts carry no risk and your child is guaranteed to get back the money which goes in along with some interest.

Share accounts invest your child's money in company shares and if these go up in value, so will your investment. However, if the shares go down in value, this could eat into your investment. There are no promises or guarantees with share-based accounts. But in the past an amount of money left for a long time in this type of account has grown more than the same amount left in a savings account. Figures from the Barclays Capital Equity Gilt Study are conclusive about the historic case for choosing equities rather than cash. Based on investment returns since 1899, the study shows that there was a 99% likelihood of equities performing better than cash over any given 18-year period.

Stakeholder accounts also invest your child's money in shares in companies but the Government has made certain rules for these accounts to reduce the risk of investing in shares. The money is invested in a number of companies rather than one and once your child is 13, money in the account starts to be moved to lower risk investments or assets.

Pitter patter of pounds and pence

Account providers don't run Child Trust Funds for free. With cash accounts, you need to shop around for the best rate of interest. For share accounts, compare the percentage of the investment which is paid as a fee. The charge on the stakeholder account is limited to no more than 1.5% a year which means the charge can be no more than £1.50 for every £100 in the account. Charges on all other types of CTF account are not limited in this way.

In addition to account angst, there is a dirty rumour doing the rounds that if you do not invest the voucher by 'a certain date' your child will lose out on the money. This is not true. What is true is that if you have not used the voucher to open a Child Trust Fund within a year of receipt it will expire and HM Revenue & Customs will open a stakeholder account on behalf of your child. They will then write to you with the details so that you can manage the account and switch it if you prefer. The exipry date is printed on each voucher. Remember that the sooner you open a CTF account, the sooner it begins to grow and if you wait for HM Revenue & Customs to open the account, your child's money will miss out on up to a year's worth of growth. Expect a reminder letter from them soon if your voucher is still gathering dust on the mantelpiece.

Nationwide Building Society urges parents who have yet to invest their voucher to do so. Of the 200,000 Child Trust Fund applications it has received so far, around one third are for share accounts and the remainder are for cash accounts. But the cash route is not everyone's first choice.

The Children's Mutual says parents who are confused about where to put their Child Trust Fund should put it in a stakeholder account as soon as possible. The comments come from chief executive David White who says: 'The stakeholder account has been designed specifically for the CTF - we'd urge parents who are unsure about where to put their voucher to choose a stakeholder account and do it quickly.'

He said parents who had not placed their voucher should be following the lead of 75% of parents who had placed theirs in share-based accounts as they had historically outperformed cash accounts. Many deposit account providers have reduced interest rates following the Bank of England base rate reduction in August and Mr White cautions those parents who had chosen a cash CTF that they will need to keep a very watchful eye over time on how interest rates on their child's account were changing: 'A parent who had invested in a cash CTF in April would have an account worth £257, while an investment in an equities-based CTF would have grown to £273, ' he says.

Meanwhile, Sainsbury's Bank estimates that child trust fund vouchers worth over £60 million have been misplaced or lost by parents. It is urging them to obtain replacement vouchers from the Inland Revenue's Child Trust Fund helpline on 0845 302 1470 between 8am and 8pm. There is no charge for reissuing vouchers.

In order to help parents weigh up the various options the Investment Management Association has published a fact sheet 'Guide to investing in a child trust fund'. The guide looks at the different types of CTF accounts and explains the risks and rewards from those which invest in shares, bonds and cash. Copies of this and other free publications from the IMA are available both online at www.investmentuk.org/investors or in hard copy format by calling the Investment FactLine on 020 7269 4639. Independent best buy tables from Moneyfacts can be found online: http://www.moneyfacts.co.uk/menus/main/menu_child.htm.