Until a fortnight ago, I was unaware that you could invest a child trust fund in an exchange traded fund. But a number of stockbrokers, including Redmayne-Bentley, Pilling & Co and The Share Centre, offer self-select CTFs, which allow parents to use their allowance to buy a range of individual shares, including exchange traded funds, for their children.
I made my discovery after casting my eye over a performance table of all CTFs collated by Bestinvest. It made for interesting reading. Top of the pile was the iShare FTSE/Xinhua China 25 fund, which has returned 86 per cent since launch. Isis smaller companies (+62 per cent) and F&C private equity trust (+60 per cent) followed in second and third place while iShare’s FTSE 250 with 59 per cent came fourth.
Invesco Perpetual income, managed by star manager Neil Woodford, with returns of 54 per cent, was another notable fund and came ninth place. At the wrong end of the table was Lloyds TSB’s stakeholder offering, which returned just 14 per cent.
Perhaps too many people are missing out on a real opportunity with CTFs?
It is easy to lambast the Government for the failure of one in four parents to invest their child trust fund vouchers as soon as they are received. In any event, children still get the money as it is invested automatically after a year into a stakeholder plan so it is not as though they miss out on £250.
What is more, you can hardly blame the Government for hailing its child trust fund scheme a success. More than 2.5 million CTFs have been set up in the past couple of years, of which 75 per cent have been opened by parents. Moreover, three in four of all vouchers were placed in share-based accounts, which are preferable to cash accounts over the long term. Given the apathetic nature of most people when it comes to financial matters, such a voluntary response can justifiably be deemed a success.
But when all is said and done, there seems little doubt that the CTF is missing its target audience – those on low incomes – by a country mile. Figures by the Treasury show that the take-up rate has been significantly lower in deprived areas, where children stand to benefit the most. As with stakeholder pensions, CTFs are fast becoming another tax perk for the middle classes.
The real beneficiaries are the likes of three-year old Piers Harris, who was featured in The Sunday Telegraph last month. Living in Hampstead with an astute father who works in the financial industry, he has accumulated a pot of £4,500 already thanks to being invested in the China iShare over the past two years.
But if the CTF is here to stay, then we might as well make the most of it. Thousands of parents are catching on to the real potential of the CTFs – the ability to top up the Government’s handout to the tune of £1,200 in any one year (again, Piers’ fund has been topped up to the max, too). Set up a direct debit to pay £30 a month into a CTF from day one and it will be worth £7,719 by the child’s 18th birthday, assuming modest growth of 5 per cent a year. Get 7 per cent annual growth and it passes the £9,000 mark. So far, the lion’s share of the money is going to Nationwide (a cash fund) and restricted stakeholder funds offered by The Children’s Mutual and Family Investments. But perhaps those with investment nous or a financial adviser might be able to make the most of their CTF by investing in funds that have the best opportunities.
There are more than a dozen funds that include trusts managed by the likes of F&C, Gartmore and Invesco Perpetual. Admittedly, China may not be the most suitable option right now but who would you rather be managing your money – Neil Woodford or Abbey.
I have no doubt that come 2023, when the first CTF accounts mature, the majority of 18-year-olds will have nothing more than a few hundred pounds to blow on a partying frenzy or a holiday with their mates in the sun. But people who take the time and have the inclination not to waste the tax-free opportunity may be able to build a tidy nest egg for their children. It does not have to be a dead duck.
Paul Farrow is money editor at the Sunday TelegraphMoney Marketing.