With equities suffering a major fall, parents are asking how to ensure their youngsters end up with a worthwhile nest egg. Esther Shaw reports
The child trust fund is still being actively marketed as a great way for families to hatch a tax-free nest egg for their children's future but now, with the major stockmarket downturn, parents may need to review the way they invest this government-sponsored voucher.
Under the CTF scheme, which was launched in April 2005, a pounds 250 lump sum is given to every child born after 1 September 2002, rising to pounds 500 for children from low-income families. Children then get an additional pounds 250 voucher at age seven, while friends and family can also add up to pounds 1,200 each year.
Parents can decide whether to invest the voucher in a deposit-based account, or a "stakeholder" or "non-stakeholder" fund - both of which are shares-based.
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Stakeholder funds invest in equities before switching to safer bonds and cash once the child reaches their teens, while the non-stakeholder funds carry higher charges, but aim to generate more growth through riskier stock market investments. The deposit accounts work in the same way as an ordinary savings account and so bear no risk of loss.
Share-based savings schemes have historically produced better returns over the long-term than cash-based schemes, but in the wake of the economic turmoil, equity-based CTFs have suffered.
"The credit crunch has hit CTF investors hard," says Darius McDermott, from independent financial adviser (IFA) Chelsea Financial Services. "In 2008 alone, pounds 1bn was wiped off the value of equity-based CTFs, while the stakeholder accounts, championed by the government for their low-risk strategies, lost more than 25% on average."
And while equity-based CTFs have fared badly, cash CTFs have gained in value. In fact, those who put their pounds 250 voucher into a cash account with Hanley Economics building society in April 2005, for example, have enjoyed close to a 29% return and earned pounds 72 on their initial pounds 250 investment, according to financial analyst Moneyfacts.
In contrast, those who hold a stakeholder CTF now have an average of pounds 230 - a loss of 8% of the fund's value; those who invested with the CIS UK FTSE4Good Tracker Trust now have only pounds 216 - a 13.5% loss. But while this makes for grim reading for those with the stakeholder CTFs, parents must be mindful that their children cannot access the money until their 18th birthday.
Cash rates have also started to fall recently, warns Andrew Hagger, from price comparison service moneynet.co.uk. "Cash-based CTF account rates have taken a battering over the last six months, along with the rest of the savings market," he says. "Last October, the average rate was 6%, whereas this has now slumped to 2.38%."
Where to invest
In this uncertain climate, working out where to invest is a challenge. "Cash accounts are safe and simple and an ideal home for your child's nest egg if you feel uncomfortable investing in a volatile stock market," says Hagger. "Also, there are no annual charges."Hannah Edwards, from stockbroker Killick and Co, adds parents can afford some short-term volatility for their chosen investments if their risk appetite permits. "I suspect there are many parents who would be better off investing in a cash fund," she says. "The ongoing appetite for cash individual saving accounts (Isas) ahead of stocks and shares Isas is testament to this."
But not all are convinced. Rob Hudson at discount broker Chartwell says parents looking to keep adding money to the CTF, would "be better off investing in equities rather than a cash CTF."McDermott adds that the performance figures should not be a signal for parents to stop investing in equity-based CTFs. "Parents need to bear in mind that in the history of equity investing, few years have been as truly horrific as 2008," he says. "It will take some time for returns to smooth out, but given the long-term horizon of a CTF, it should, at maturity, still deliver a healthy return."
He recommends two non-stakeholder funds. "The Children's Mutual Invesco Perpetual Income has returned almost 25% since launch, while the Children's Mutual Gartmore European Selected Opportunities has gone up 26%," he says. "These are far better than the best performing stakeholder CTF."
If you are unhappy with the performance of your shares-based CTF, you are free to switch from one provider to another - or to another fund offered by your current provider.There is also nothing to stop you switching to a cash-based CTF -although Geoff Penrice, from IFA Bates Investment Services, warns this could be a bad decision. "This is not the time to do it," he says. " In fact, with share prices so low, this might be the time to move out of cash."
Nonetheless, there will be those who remain risk-averse. For those who want the security of a cash-based CTF, Hagger picks out Hanley Economics building society paying 5% and Yorkshire building society paying 3%.
While some argue that parents should put all they can into their children's CTF to maximise the tax relief, Adrian Lowcock, from IFA Bestinvest, says it should not be the only vehicle. "Parents should make use of the government contributions to the CTF, but should also invest elsewhere, as the CTF can't be accessed once it has been invested until the child reaches 18," he says.
Budget changes
Disabled children are set to benefit from an additional payment of pounds 100 a year into their child trust funds - rising to pounds 200 for the severely disabled - following changes announced in last month's budget by chancellor Alistair Darling. "This means that, next year, around 100,000 children will benefit from the additional annual payments of which an estimated 40,000 will qualify for the higher pounds 200 allowance," says David White from the Children's Mutual. "An extra pounds 100 a year could mean more than an extra pounds 3,000 at age 18, and for the severely disabled, pounds 200 a year more could mean an additional pounds 6,000."
