Your baby's booster has come of age

As the first vouchers are invested in child trust funds, Sam Dunn asks if you should put the money on deposit or into the markets

It's amazing how much hope can be invested in a single token. On Wednesday, a voucher for £250 - sent out over the past three months to more than 1.6 million parents across the UK - will be eligible for investment in the newly created child trust fund.

It's amazing how much hope can be invested in a single token. On Wednesday, a voucher for £250 - sent out over the past three months to more than 1.6 million parents across the UK - will be eligible for investment in the newly created child trust fund.

Great expectations are riding on this Government-sponsored savings plan that gives £250 (or £500 for low-income families) to every child born on or after 1 September 2002.

The money will be kept out of their reach and grow tax-free until they turn 18, at which point they will be free to do what they wish with the lump sum.

It is hoped that youngsters will develop a sense of saving as they grow up with their own pot of money. But what happens to that voucher in the meantime is crucial - and this is where parents play a key part.

The Government money is a good start: £250 to set you off, another £250 when your child is aged seven and, subject to future consultation, a similar sum at the age of 11. But parents can also make their own contributions - up to a maximum of £1,200 every year - and to get the best returns for all this money over 18 years, they have a choice of three types of investment with varying degrees of risk and reward.

First up is a cash deposit savings account, typically offering between 4 and 6 per cent interest on your money.

Providers of these funds include Yorkshire building society, which pays 6 per cent. But you must be registered with it before Wednesday 6 April and be able to put at least £200 extra into the fund in a single financial year; otherwise, the rate is 5 per cent.

Second, there is a "stakeholder" equity fund whose main selling point is low annual charges capped at 1.5 per cent. This switches out of the stock market and into safer investments, such as bonds and cash, as the fund nears maturity so that your child's savings won't be exposed, irrevocably, to any lurch downwards in the markets.

For example, the Halifax stakeholder plan tracks the FTSE-100 share index; at age 13, the money will be moved slowly into the less risky assets in a process known as "lifestyling".

Finally, there is the "shares" option, which exposes the money for longer to the potentially high rewards of the stock markets but costs more to run and also entails higher risks.

The Bonus Builder Child Trust Fund from Liverpool Victoria offers a shares plan that invests in the friendly society's own with-profits fund. Here, your child's money will be spread across a broad range of investments, including UK and overseas shares, property, cash and bonds.

Where you decide to put the voucher may well reflect your attitude to risk. But there is a concern that, fearful of losing on the markets, too many parents will plump for the cash deposit account. Over such a prolonged period as 18 years, say many specialists in the financial services industry, equities will yield greater returns than cash as there is plenty of time both to enjoy the good times and to ride out any market downturns.

"Most people seem to be choosing cash because of the safety element - but this is a mistake," says Ben Yearsley of independent financial adviser (IFA) Hargreaves Lansdown. "I would back equities over cash. The markets go up and down and are volatile, but over such a time, it's the best option."

Your decision between the different types of child trust fund is especially important if you plan to add your own money. Parents who put the Government handout into a cash deposit fund, but make no plans to invest anything on top, could expect their child to turn 18 with between £700 and £1,000, according to industry estimates.

But if they were to invest the maximum £1,200 each year into a stakeholder child trust fund, on top of the Government's contributions, various calculations suggest that the child could come of age with a lump sum of nearly £40,000.

Before you go and invest in a stakeholder plan, however, it's worth noting that a number of these funds have attracted censure. Many are trackers whose charges seem high. For example, where the Halifax tracker costs 1.5 per cent inside a child trust fund, it costs just 1 per cent as a standard product.

"This 1.5 per cent is a price normally paid for active fund management [selecting stocks on the customer's behalf] rather than passive [index-following] management," adds Mr Yearsley.

For a stakeholder, he recommends HSBC, which invests child trust fund money in its own UK Growth and Income fund. You can move the money into a different fund, and swapping between cash deposit schemes won't incur charges.

If you've lost your voucher or don't want to make a decision, let the Inland Revenue solve the problem for you. A year after the voucher has been issued, your right to choose will expire and the taxman will pick a stakeholder fund for you at random.

Contacts: for a full list of providers, log on to www.childtrustfund.gov.uk. Or try www.moneyfacts.co.uk for full details of cash funds.

TWO YEARS OLD AND £250 TO THE GOOD

He might not know the meaning of money at the moment, but two-year-old Tyler Cowburn is a lucky boy.

On top of the £250 investment voucher from the Government, his father Daniel Cowburn, from Leek in Staffordshire, plans to invest up to £60 each month in the child trust fund.

Daniel, married to Denise, has opted for a cash deposit account from Britannia building society. This will pay 6 per cent interest, tax-free, for the next 12 months. At the end of this period, the interest paid will drop to 4.75 per cent.

Daniel, who works for Mercedes-Benz, says he investigated the different options available but settled on Britannia's deal for several reasons. "For a start, I think cash is a lot safer than putting it in shares. There is also a branch of the building society nearby and I have a separate savings account with it too."

He plans to put between £50 and £60 in the child trust fund each month, and hopes the extra sums will help turn it into a great 18th birthday present for his son.