Ignoring Child Trust Funds Can Prove Costly

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Child Trust Funds (CTFs) are a tax efficient way of saving for your child's future but despite the UK Government kick starting savings with a £250 cash injection for each child born since 1 September 2002 there is still apathy among parents to contribute to the plan.

A recent survey conducted by Xentum Wealth Management concluded that only 50 percent of people who have pensions and savings in place for themselves have taken advantage of strategies to save for their childrens future despite Government initiatives to encourage parents to do so.

Independent financial planners Xentum report that only half of its clients with pre school children regularly contribute to a CTF and are potentially missing out on a £35,446.80* nest egg for their children when they reach 18 years of age.

Dominic Baldwin managing director of Xentum said: "Clients who don't take advantage of the CTF mainly cite that they were too busy and that it had slipped their minds to arrange regular payments. Often, they are simply bewildered by the choices open to them. For a relatively modest monthly payment the lump sum when the child turns 18 can be as much as £35,000. This instantly solves the huge financial strain which is put on parents when children enter higher education or need help moving out of home or purchasing a first car. Equally, the lump sum can be transferred to an individual savings account (ISA) when they reach 18."

CTF's in a nutshell:
Have been available since 6 April 2005 and apply to all children resident in the UK born from 1 September 2002.

Normally opened by a parent or guardian who will be responsible for managing the plan until the child is age 16

The Government contributes £250 to each CTF at birth and a further £250 at age seven (children in low income families may receive a further £250)

The maximum that can be contributed to a CFT each year (between a child's birthday) is £1,200 from all contributors e.g. parents, grandparents, friends etc * For example based on an annual premium of £1,200 at a growth rate of 5% (factoring in charges) at the 18th year, if you'd started the plan the year your child was born it would have a cumulative value of £35,446.80.

Unused allowances cannot be carried forward

No UK tax on income and capitals gains

Parental settlement rules do not apply

Cannot be accessed until the child reaches age 18 (although a child can make investment decisions from age 16)

On the child's 18th birthday, the CTF will cease and the child will be able to access the money. If the money is not taken then it can be rolled over into an Individual Savings Account (ISA)

There are three types of CFT available:
1. A savings account CTF which is essentially a deposit account

2. A stakeholder CTF which invests in shares and must meet certain Government standards on charges, payment options and minimum contributions. Once a child reaches age 13, a stakeholder CTF will gradually switch into less risky investments.

3. A non-stakeholder CTF which invests in shares. Non-stakeholder CTFs generally have a greater range of funds to invest in and are not subject to the Government standards on charges, payment options and minimum contributions. Non-stakeholder CTFs will not automatically switch into less risky investments from the age of 13.

Dominic adds: "Even if you've missed out on the first couple of years, it's never too late to start as the rewards will come later. If your child was born before 2002 and isn't eligible for the CTF, it's worth setting up a regular savings plan with an equally tax efficient ISA. Mentally put the money aside for your child's future and be disciplined by not dipping into the fund."

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