There are three types of CTF accounts – savings accounts, share accounts and stakeholder accounts – which allow investment in shares but use a lifestyling approach to move away from equities as the trust start to approach maturity.
Cash savings is always a popular choice because it is 100 per cent assured . Blackadders Financial Services director of invest-ment services Keith Thomson says: “If the client is really risk-averse, Nationwide and Yorkshire usually offer the best rates for cash.”
However, cash investments are unlikely to receive the same growth as stakeholder or share accounts. Cash deposits also do not fare well when the effect of inflation is taken into account and, because this is a long-term investment, this is especially the case if no additional top-up funds are added. Added to this, providers will also charge for the cost of running the account which could all mean the original cash investment might lose value.
Chelsea Financial Services managing director Darius McDermott says: “We don’t like cash CTFs. If you are looking to do something with the money, you have got 18 years of growth to consider. Keeping it as cash won’t make the most of this time so it is best to put it in more risky investments to make the most of the compounding effect of growth time.”
Thomson says: “What should be done is to properly explain to the parents about the options that a 18-year time horizon provides. Investments in the stockmarket always outperform cash investments.”
This is backed up by the Government’s own website promoting CTFs which says equity investments have outperformed “for every 18-year period in the last 40 years”.
Stakeholder accounts offer exposure to equity investments in the first years on the CTF and then start to move investments into lower-risk assets such as cash at 13 years old. As with all stakeholder products, management charges are capped at 1.5 per cent. But the choice in the investment is very restricted.
Hargreaves Lansdown head of research Meera Patel says: “Stakeholders are not always the most competitive.”
Churchouse Financial Planning director Keith Churchouse says: “I would suggest equity-based investments The Children’s Mutual Fund gives a good range of choices and should meet the needs of parents with even the most aggressive attitude to risk as it gives access to some Oeics.”
McDermott says other good funds worth considering are: “Redmayne Bentley, a stockbroking firm which gives access to ETFs that include oil and gold. F&C is another option, it offers 13 CTF equities that include global stockmarkets and investment trusts.”
To get the most out of a CTF, it is often suggested that the initial Government voucher is topped up with additional contributions. The current rules allow 1,200 a year to be added to the CTF but as Patel points out: “The money is locked up so if you want flexibility with the investment, it might be best to put any top-up money into a normal Isa which gets the same tax rates as a CTF.”
If a parent does wish to maintain some parental control, it is best to put additional funds in a separate Isa under their own name.
But Thomson says “If you want to put money away for a child to receive at 18, put it in a trust fund. Anywhere else and the money could be spent or be lost as part of the parent’s estate if inheritance tax is a concern. If left in the guardian’s name, it can be taken away as an asset if the parent goes bankrupt. A trust fund is a good place to ensure that the money is not frittered away.”
For investors looking for an ethical aspect to their investments, there are several options available. The Children’s Mutual and Healthy Investments both offer ethical equity CTFs and Methodist Chapel Aid offers an ethical cash CTF. Family Investments offers an actively managed ethical stakeholder CTF.
Children’s Mutual also offers a Sharia compliant stakeholder CTF. There are lots of providers offering CTF accounts and the decision to invest will depend largely on the amount of risk that parents are prepared to take. If there are religious or ethical concerns, it is worth scouting the market as there are several CTF accounts that will cater for them. Patel says: “The 250 is free money so it is worth investing and investing wisely and equity shares offer the best return.”