Five Questions About: Child trust funds

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The Independent Online

What's happening?

All parents used to receive a £250 Child Trust Fund (CTF) voucher to invest on behalf of their children, with those on lower incomes receiving £500. A further payment was made when a child turned seven. However, on 1 August the value of the vouchers dropped to £50 and no payments will now be made at seven. Vouchers will be phased out by the end of this year.

Why are they going?

To save the Government £320m this tax year and £520m next year, to help cut the Treasury deficit.

If I've already got a CTF account, will I still be able to pay into it?

Yes, you will still be able to make contributions. Family and friends can pay up to £1,200 into a Child Trust Fund every year, free of income and capital gains tax, until a child turns 18.

I'll just miss out on the vouchers. Where are the best places to save for my child?

It depends how long you invest and your approach to risk. Most people save for their child's future for up to 18 years. Over such a long period, stocks and shares are likely to provide better returns than cash deposits. If parents are not using their annual individual savings account (Isa) allowance, they could use this to build up savings on behalf of their children, thus avoiding income or capital gains tax. You can save up to £10,200 in Isas this year, but they cannot be owned by children directly. Seek independent financial advice on the best funds to suit your needs.

I don't have a strong appetite for risk, where should I save?

Consider a regular, high-interest savings account. Norwich & Peterborough Building Society's Family Regular Saver account pays 5 per cent gross interest a year, but you only get this rate if you put money in every month. If you don't do so, the rate drops to 2 per cent. The most you can pay in is £250 a month and the minimum is £1. If you want a child to have their own savings account, then Northern Rock's Little Rock Instant Access account pays 3 per cent interest a year.

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