Before making my conclusion on the best home for long-term savings for a child, I thought it would be worth reviewing Child Trust Funds or CTFs as they are known.

CTFs were introduced by the Labour Government in September 2002 in order to encourage parents and grandparents to save for a child’s future within a tax efficient plan.   Furthermore, to encourage all families to utilise these plans the Government’s initial offering provided every child £250.00 at birth and an extra £250.00 on the child’s 7th birthday.  Both these contributions were boosted by an extra £250.00 for low income families.

There are numerous provides of CTFs all vying to be custodians for these plans over the 18 year term.  Once the plan is started you can make further contributions to a maximum of £1,200 per year per child.  This can be either as a lump sum or regular payment.  The plan becomes the responsibility of the child’s from age 16 but withdrawals cannot be made until age 18.

So what could a child expect to receive if he/she was in the fortunate position to have the maximum saved on their behalf for the full 18 years?  Maximum contributions would be £1200 x 18 + £500 (from the Government), a total of £22,100.  Assuming 4% pa compounded growth the child could expect a sum in the region of £33,000 – not bad and in an age when further education costs are spiralling and this sort of sum could go a long way to funding those costs, or could it?

Firstly, it must be remembered that the fund becomes the child’s at age 18, for them to do with as they see fit i.e. despite your best wishes that they will use the money wisely for, let’s say education costs, or a deposit on a first house they may not.  It could get blown very quickly on fashion accessories and parties.  Obviously as parents we all hope that some of our worldly wisdom will rub off on our children and that they will apply sense to how they choose to use the money. As George Best once famously remarked: “I spent a lot of money on booze, birds and fast cars. The rest I just squandered”.

Secondly and as previously articulated in my blog about OEICs you must review the providers’ charges.  A stakeholder managed fund will routinely charge 1% Annual Management Charge (AMC) this would equate to £3,310 if the maximum is saved thus reducing your child’s pot to £29,690.  If you elected for a non-stakeholder plan the AMC is likely to be in the region of 1.5% and you can expect to pay an additional 5% initial charge on all contributions to whichever actively managed fund you select, In this instance you can expect to pay overall charges of £6,190 over the term which reduces the fund to £26,800 (You would hope that for these extra charges you would attain a higher rate of return but there are no guarantees that the fund manager/s will achieve this).

I am certainly in favour of having an approriate product to encourage all families to save for their children’s future but although I have taken out 2 plans myself I am not fully convinced that CTFs are the best solution.  This is not just because of the potentially high costs involved but also because of the ownership of the funds once the trust has matured.  Interestingly, the current Government firstly reduced payments to £50 per child on birth only from 1st August 2010 and completely ceased the scheme to children born after 1 January 2011 because of its affordability.  However, the Coalition Government are still planning on launching a child’s Individual Savings Account (ISA) in the autumn of this year. Draft regulations were tabled alongside the Finance Bill on 31st March 2011 with final regulations due to be confirmed in July 2011, so watch this space!