The Child Trust Fund (CTF), a long-term tax-free savings account for children, was launched with great fanfare by Labour in 2005, but scrapped by the coalition government in 2011 who introduced the Junior Isa as a replacement scheme. Although the two schemes have not been merged they ought to be, and any excuses for not merging the two are lame. Castle Trust’s research reveals that 2.8m families are paying into Child Trust Funds. However, the institutions know that they are less likely to get the level of CTF investment they originally anticipated and have no incentive to provide competitive products or rates.
So a generation of children is locked into expensive and poorly-performing funds
F&C was described as the ‘one beacon of hope for some decent returns’ for CTF investors, offering access to its range of actively managed investment trusts. However, F&C has just announced that it's going to put an annual administration charge of £30 on its shares account CTF starting on 6 April 2013. For anyone who just had the £250 government voucher in this scheme it will be a disaster - funds could simply dwindle away to nothing due to this 12 per cent equivalent charge. Even parents contributing higher amounts will find that their investments are eroded by this additional charge.
F&C is not alone in introducing high charges - Witan has already replaced its 1 per cent annual management charge with a £36 flat fee. My children’s funds are in the alternative F&C stakeholder CTF plan, which has an eye-watering charge of 1.5 per cent for a tracker fund (standard among other stakeholder CTFs). Having received their statements this week, I’m regretting my decision.
Saving for children is by definition a long-term investment and even for children born on 1 September 2002, who are now aged 10 and have eight years before they can draw funds, it still makes sense to maximise returns by reviewing where you are saving.
I am considering the Child Investment Account from the Share Centre, which I think is a better option for parents who are serious about investing on behalf of their children in a CTF. This account is a flexible option for those who want to make their own investment decisions and manage the portfolio themselves. You can contribute via regular savings or lump sums in a wide range of investments including shares, funds, gilts and bonds.
Although there are no specific fees for transferring, stamp duty and dealing charges may still apply with share-based accounts.
It has an initial dealing charge of 1 per cent (minimum £7.50) and then an annual charge of 0.5 per cent. If you want to invest in funds then you will pay the fund manager’s charges in addition to this but the Share Centre provides access to plenty of funds with discounted initial commissions.
However, until the CTF is merged with the Junior Isa, I don’t think I’m going to get the best value for my children’s money. So I’m also considering stopping mine and grandparents’ contributions into the CTF and funnelling them elsewhere.
Before CTFs came along, if you wanted the money you give to be the child’s property, the simplest way to do this was through a bare trust - and this is still an option for parents and grandparents. It is tax efficient and when the child reaches 18, they gain full control of the investments. This is a particularly good option for their grandparents' money. If the money in a bare trust was given by a parent and it generates annual income of more than £100, it will be taxed as the parent's own.
All funds can be set up as bare trusts, including many investment trust savings schemes - these allow investments from £25 a month. However, you need to check charges and make sure you are happy with them as there may be no advantage over the CTF. For example, the F&C Children's Investment Plan also has the £30 annual management charge. Alliance Trust Savings First Steps plan (which allows investments in a range of funds, investments, equities and exchange traded funds) has a quarterly administration charge of £10 + VAT.
