What are Child Trust Fund Share-Based Accounts?
[NOTE: The closure of the Child Trust Fund Scheme was officially announced by government in May 2010. Government payments into the Scheme will be phased out after 1 August 2010 and the Scheme officially closes on 1 January 2011. The information that follows here relates, therefore, to a discontinued scheme and is for reference only.]
Child Trust Fund share-based accounts invest in shares in companies, and thus provide your child’s savings with all the benefits of investment in the stock market.
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Stock market investments have been shown to generally provide better returns than cash savings, when invested for the longer term. An investment term of 15 years or more is best, which makes share based accounts for children ideal for saving from your child’s birth year until they turn 18.
While the potential for good returns is higher with child share based accounts, compared to cash savings, there is a higher risk as well. Most of us are familiar with the advice given to many stock market investors: the value of investments can fall as well as rise. This is true for any investment fund, including Child Trust Fund share-based accounts.
When companies in which shared based accounts for children have invested fail to perform well, the value of the investment may fall. However, poor performance adversely affecting Child Trust Fund share-based accounts can be balanced by good performance in other years, and this is what can result in better-than-average savings growth over time.
While nothing is certain in stocks and shares investments, experience shows that share based accounts for children almost always do better than cash-based savings accounts over 18 years.
Child Trust Funds - Share-based Accounts
Child Trust Funds were set up by government to provide children born after 1st September 2002 with child savings accounts, and a lump sum which they receive on their 18th birthday.
Child Trust Fund share-based accounts are one of the three categories of child trust funds. As they invest in stocks and shares, they may be more interesting than the Child Trust Fund Savings Account, especially at times when interest rates are low. At such times, cash savings may even fail to keep pace with inflation, so that their real value may be reduced, rather than increased.
As with each of the Child Trust Funds accounts, Child Trust Fund share-based accounts are opened with the £250 voucher provided by government, which is sent through the mail to new parents.
Once the voucher has been used to open the child share based accounts, parents, relatives and friends can make payments into the account, up to a total limit of £1,200 per year.
For parents on low incomes who are receiving Child Tax Credit, a second amount of £250 may be given, bringing their total for opening their Child Trust Fund share based account to £500. Government makes a second, similar payment of £250 or £500 directly into Child Trust Fund share-based accounts when your child turns 7.
As your children grow, income and gains in their Child Trust Fund share-based accounts accrue free of tax. The savings in Child Trust Fund share-based accounts are paid out when your child turns 18, making them an ideal nest egg for entering third-level education. However, this is not the only purpose of child trust funds, and the money can be used for any purpose your child decides.
