A Child Trust Fund (CTF) is a long-term savings or investment account set up for children. Designed to help young people start adult life with some financial support, CTFs allow tax-free growth and remain locked until the child turns 18. With a range of options available, it’s important to choose the right type of CTF for your child’s future. Discover how to assess and select the best CTF.
Types of Child Trust Funds
A CTF account can be set up for children born between 1 September 2002 and 2 January 2011. There are three main types of Child Trust Funds, each offering different benefits based on how you prefer to save or invest:
1. Savings CTFs
These are similar to a traditional savings account, offering a fixed interest rate with minimal risk. Your child’s money grows steadily without exposure to the ups and downs of the stock market.
Best For: Parents who prefer a secure, low-risk option with guaranteed growth.
Considerations: Interest rates may be lower compared to investment-based accounts, and returns might not keep up with inflation.
2. Stakeholder CTFs
Stakeholder CTFs invest in stocks and shares, with a government-regulated cap on charges (maximum 1.5% annually). They include built-in safeguards to reduce investment risk as your child nears the age of 18.
Best For: Families willing to take a moderate level of risk for potentially higher returns over the long term.
Considerations: Investments can fluctuate in value, meaning there’s no guarantee of profit.
3. Shares-Based CTFs
These accounts are fully invested in the stock market without the safeguards found in stakeholder accounts. They have the potential for higher returns, but also come with higher risk.
Best For: Experienced investors or those comfortable with higher risk in exchange for the chance of substantial growth.
Considerations: Returns can be unpredictable and depend on market performance.
How to Compare and Choose the Right CTF
1. Assess Your Risk Tolerance
Your level of comfort with investment risk will be a key factor in choosing the right CTF. If you prefer stability, a savings CTF is likely the best choice. If you’re open to potential ups and downs for greater returns, a stakeholder or shares-based CTF may be more suitable.
2. Check Interest Rates and Charges
For savings CTFs, compare interest rates offered by different providers to ensure your child’s money grows as much as possible. For investment-based accounts, consider the annual charges and management fees, as these can significantly affect the long-term value of the fund.
3. Look at Past Performance
While past performance doesn’t guarantee future results, it can give you a sense of how well an investment-based CTF has performed over time. Look for consistent growth and lower volatility.
4. Consider Switching Providers
If your current CTF isn’t offering competitive returns or you want a different type of account, you can transfer it to another provider. Just ensure the new provider supports CTF transfers and offers the features you need.
Building a Strong Financial Future with the Right CTF
Choosing the right Child Trust Fund is an important decision that can have a lasting impact on your child’s financial future. By understanding the different types of CTFs and evaluating your risk tolerance, financial goals, and the available options, you can make an informed choice. Whether you prefer the stability of a savings account or the growth potential of an investment-based fund, the key is to regularly review and adjust the account to ensure it continues to meet your needs.