Using your child trust fund: easy as learning your ABC

Like the kids who'll be the first to benefit from them, the Child Trust Fund has done a lot of growing up in the four and a half years since it was launched.  

Introduced in January 2005, the accounts are designed to ensure every child has some savings behind them when they turn 18.

All children born in the UK on or after 1 September 2002 receive a government voucher of £250 to kick start their account, with a further £250 paid into the account at age seven. Children from lower income families benefit from a higher amount of £500 at birth and again at age seven.  

Furthermore, in the 2009 Budget, the Government announced extra contributions would be made to the child trust funds of disabled children in recognition of the higher financial needs they are likely to face when they reach adulthood. An additional £100 a year will be paid to the child trust funds of all disabled children, with those with severe disabilities receiving £200 per year.

In addition to the initial government voucher and subsequent top-ups, parents, family and friends can all contribute up to £1,200 per year to the fund. No tax is paid on any gains in the account, although once invested, the money is locked in until the child's 18th birthday.

So far, more than four and a half million children already have savings put aside for their future thanks to these accounts.

Parents have a year in which to invest the money on their child's behalf and can choose between a cash savings account, a stakeholder account with a lifestyled equity option and a non-stakeholder equity account. If no decision has been made after 12 months, HMRC automatically opens a stakeholder account on the child's behalf.

Indeed, with the latest official figures suggesting around a quarter of accounts are being opened by the Government, it is feared parents are not as engaged with the scheme as they should be.  

However, efforts are being made to boost the number of people who open the accounts for their children. A new voucherless system has been in operation since April, so now accounts can be activated by phone or online, instead of having to apply by post.

The new scheme is in its infancy but the early signs are said to be encouraging. It is thought getting more parents to open the child trust fund account for themselves is key to improving the chances that they will make additional contributions too.

Eighteen years of solid saving should see a sizeable nest egg build up, perfect to pay for university fees, a new car or a deposit on a first home. However, with the purse strings by then in the control of your 18 year old offspring, convincing them to spend it wisely might be one of the hardest things you have to do!