Will parents invest their extra £250?

Child trust funds just got chunkier.

In last week's Budget, Gordon Brown confirmed there would be another £250 payout for children on their seventh birthday.

Launched in April 2005, the CTF savings scheme currently gives £250 to every child born on or after 1 September 2002 (or £500 for those from low-income families). Relatives and friends can add up to £1,200 a year to the accounts to help build a nest egg that grows tax-free until the child turns 18.

The Chancellor's latest announcement means that children will receive an extra government contribution to their funds when they reach seven. While most will get £250, those from poorer families will again be given £500.

But while the expansion of CTFs is to be welcomed, recent figures show only a modest take-up of the funds. Of the 2.3 million vouchers that have been sent out, only 1.48 million had been cashed in as of 20 February, according to Revenue & Customs.

When deciding where to invest the voucher on their children's behalf, parents have three choices: a deposit-based cash account; a "stakeholder" fund investing in the stock market (but pulling out slowly once the child reaches the age of 13); and a more expensive "non-stakeholder" equity fund.

So far, most parents have opted for the safest option: the cash account. Research shows that this is usually because of concerns about losing the money; a lack of enthusiasm for the equity stakeholder; and apathy.

Any parents leaning towards cash CTFs need to ensure they opt for one paying a high rate of interest. There are a total of 16 to choose from, so it will pay to shop around for the best deal.

Yorkshire building society is currently topping the tables with a headline rate of 6 per cent, but this includes a bonus payment of 0.7 per cent for 12 months. After that, the rate is guaranteed to match Bank of England base rate until 2008.

Britannia building society also offers a high rate, 5.75 per cent, but again this includes a bonus (1.25 per cent for two years). The deal then equals Bank base rate until 2010.

"The bonuses are long enough to make both these accounts worth hanging on to," says Andy Hagger of the financial analyst Moneyfacts.

"But if you'd rather go for an account without a bonus, the Ipswich building society is paying 5.25 per cent."

And if your chosen CTF cash account starts to lose its appeal, you can always change your provider; there's no fee to pay.