Your complete guide to the Child Trust Fund

The Child Trust Fund is a government-sponsored savings and investment scheme and provides every child born since 1 September 2002 with an endowment of £250 as a kick start to a saving scheme.

While many of those enjoying the hectic, new world of parenthood are familiar with the term, the reality means the CTF is just another task on a to do list with few parents having enough time to research the fund that best suits their needs.

With some help from the Association of Mutual Insurers (AMI), Step Ahead has come up with a simple guide to the CTF to help you through the process. . .

1. Why have child trust funds been introduced?

The government introduced the CTF to encourage children to have savings at the age of 18 and to help them get into the habit of saving. It can also be a useful way to teach children about the benefits of savings and to understand personal finance.

2. About the CTF

All children living in the UK, born after 1 September 2002, and for whom child benefit is being claimed are eligible. A voucher and information pack will be received by the person claiming the child benefit and whoever opens the account on their child's behalf will be responsible for managing that account until the child is 16. At the age of seven, the child receives a second top up of £250 from the government. As well as a Child Trust Fund voucher, children from low income families may qualify for an additional payment. For more information contact www.childtrustfund.gov.uk or call the CTF Helpline between the hours of 8am and 8pm on 0845 302 1470.

3. There are two main factors to consider when making your choice:

Your timescale. The money will be invested until your child reaches their 18^th birthday. You may want to consider what their financial needs may be both before and after that date. Are they likely to get married or perhaps go to university?

Your attitude to risk. For example, some may prefer to take more of a risk with their child's pot of money or be prepared to see the amount fluctuate with the stock market. Others may prefer to minimise any risk.

4. There are three main types of account available:

a) Savings Account

According to government figures 22% of parents have taken out a saving account CTF since the launch of the scheme. Savings accounts mean that any money you invest is not subject to the fluctuations of the stock market or linked to the price of shares. Although money earns interest it may not grow as much over the long term as a CTF invested in shares. Inflation means that money could loose value over time and it is unlikely that £250 in ten years time could buy the same as £250 today. If you invest £250 it is likely that you will receive £250 back plus any interest. The account provider may charge you for the cost of running it so do check about the costs before opening an account. Don't forget to ask about the interest rate. How long is it fixed for? How can your provider guarantee that you get the best rate?

b) Account that invests in shares

To date, 4%of parents have taken up this kind of account. This account invests the £250 by buying shares in companies. The value of the CTF will follow the value of the share prices which means its value can go up as well as down. However, it is generally accepted that the value of this investment will rise over a long period of time because the market will tend to rise more than it falls. For every 18-year period in the last 40 years the same amount of money left in this type of account has grown more than the same amount left in a savings account. The account provider will usually charge a percentage of any value of the CTF and this should be checked before opening this type of account. Don't forget to ask about the companies in which the money is invested, you may want more information on them. You may also want to ask if there are any limits in place to ensure that, if shares do not perform well, the total amount is not lost.

c) Stakeholder Account

74% of parents have taken out this type of account. A stakeholder account invests a child's money in shares in companies; however, the government has made certain rules for these accounts to reduce the risk of investing in shares. The account provider will consider the performance of the shares and when a child is 13, the money in the account begins to be moved to lower risk investments or assets, such as cash. A provider will decide how much to move over into safer assets, and how quickly, which means a child's money will not benefit totally from any rise in the stock market but will also ensure it is protected.

Once the account is open, all CTF providers must accept minimum contributions of £10 into a stakeholder account, but they can accept less if they wish.

The charge on the stakeholder account is limited to no more than 1.5% a year. The charges on all other types of Child Trust Fund account are not limited in this way.

5. How can I be sure that any investment made is ethical?

Every Child Trust Fund provider is required to publicise its policy about social, ethical and environmental investments if they have one. Some people prefer to make sure that their child's money is not invested with such companies which, for example, are involved in arms, tobacco or alcohol. Some prefer to invest in companies who sell goods according to fair trade principles. Ask providers about their policy when you consider which account to open. The Children's Mutual www.thechildrensmutual.co.uk; 0845 0771899 and Family Investments offer ethical Child Trust Funds. www.familyinvestments.co.uk Tel 0800 616 695.

6. Shari'a accounts

Shari'a accounts are based on Islamic values, as defined by the principles of Shari's law and will not invest in areas such as alcohol, gambling or tobacco.

7. What happens if I don't open an account?

If you have not opened an account by the time your voucher expires, HM Revenue & Customs will open a stakeholder account on your child's behalf with one of a list of approved providers.

8. Adding More Money to Your Child's Trust Fund

A maximum of £1200 a year can be contributed to a CTF by parents, family of friends. The money grows tax-free until the child turns 18 when he or she can spend it as they wish.

9. Reaching 18 years of age

On your child's 18^th birthday the account stops being a Child Trust Fund and the young person has access to the full amount in the account to use as they wish. They may well choose to reinvest it.

10. Who provides CTFs?

You will see Child Trust Funds in banks, retailers and even chemists. However, while you can obtain a Child Trust Fund through 80 distributors including ASDA, Boots, Help the Aged, building societies and banks, in reality, the following seven mutual insurers provide CTF products to 63 of the 80 organisations offering Child Trust Funds.