GUIDE TO INVESTING IN A CHILD TRUST FUND

FURTHER INFORMATION – QUESTIONS AND ANSWERS

What do I do with the voucher?
How do I set up an account?
If I change my mind can I get the money back?
If I want to invest in an Investment Fund which fund should I choose?
How can further contributions be made?
What happens at various stages in a child’s life?

What do I do with the voucher?

Once you receive the voucher you need to open a CTF account in which to invest the voucher. There are a number of different types of companies offering a range of savings and investment schemes. This range includes bank and building society *cash* accounts and stock market-based investments. It is important to take care when opening a child’s CTF account to ensure that it is right for the child. Some savings products are more risky than others and it is important that you are aware of these *risks* before opening the account.

If at anytime you are unsure about how much risk you are prepared to take, or if you need further information on the range of products available you should contact a *financial adviser* for assistance.

Please note – the voucher you receive is only valid for one year. If you do not open a CTF account before the voucher expires, the Inland Revenue will open an account and invest the voucher in their nominated *stakeholder* account on behalf of the child.

How do I set up an account?

In order to set up an account you need to find a CTF distributor. The Inland Revenue has a list of distributors – companies which sell CTF accounts - on its website. The company you buy your account from may not be the same company that manages your account. This company is known as the *provider*, which may outsource the investment of your money to a third party, namely a firm which specialises in managing investments and which is likely to be a member of the Investment Management Association (IMA).

For example – you may buy your CTF from a well-known supermarket or high street bank (the distributor) but the account may be administered by another company (the provider) which will make arrangements to invest the voucher and additional contributions on your behalf. Some distributors may however sell, administer and manage your investments themselves.

If I change my mind can I get the money back?

You have 15 days from cashing the voucher in a CTF account to change your mind. The voucher and any additional contribution made at the same time as depositing the voucher will be returned to you for investment elsewhere. After this 15 day period you will be able to switch providers, but any money contributed into a CTF account can only be taken out by the child themselves when they reach 18.

If I want to invest in an Investment Fund which fund should I choose?

The fund you choose depends on the amount of risk you are prepared to take. Funds investing predominantly in cash or *bonds* are considered to be lower risk than those investing in *stocks and shares*. Before placing money in *Investment Funds* it is important that you are aware of the risks associated with different types of investment, as explained in the CTF factsheet. IMA’s guide “Introducing Investment” further outlines the risks associated with different *assets*. If you are unsure however, please contact a financial adviser for assistance.

It is important to note that although there are over 2,000 Investment Funds, not all are available for use in a CTF. Please click here for the Inland Revenue’s guide to which companies are offering investment funds within a CTF.

How can I make further contributions and what difference will they make?

A total of Ł1,200 can be added to each CTF account each year of subscription – the subscription year runs from the child’s birthday to the day before their next birthday.

This means that you can invest up to Ł100 a month into your child’s CTF, which, when you include any growth in value, could lead to a substantial sum of money for your child when they reach 18. As an indication of the power of monthly savings, an initial investment of Ł250 followed by Ł100 a month saved into a tax-free cash account over the last 18 years would have provided your child with Ł28,349¹. If you had invested the same money into a tax-free shares account the amount would be Ł58,321². Money deposited in a bank or building society is relatively secure, whereas an investment involves stock market risk. This means that the value of your investment can go down as well as up. Please note that past performance is not a guide to the future.

Contributions can be made by family and friends in the form of a one off payment or via direct debit.

Family and friends wishing to make a contribution into a CTF will need to contact the CTF provider directly and quote the child’s name and reference number. This number will be required for each additional contribution to the CTF.

^{1 Source: Standard & Poor’s. Average building society account (Ł2,500 minimum). Initial investment of Ł250 on 3rd April 1989 followed by monthly amounts of Ł100 thereafter to 2nd April 2007. Offer to bid, gross of tax, in Sterling.
2 Source: Lipper. Produced using Hindsight 5 by Investment Management Association. UK All Companies Sector. Initial investment of Ł250 on 31st March 1989 followed by monthly amounts of Ł100 thereafter to 31st March 2007. Offer to bid, gross of tax, in Sterling.

Please Note – For accounts taken out under current legislation, this favourable tax treatment may not be available in the future.}

What happens at various stages in a child’s life?

The registered contact (parent or guardian) of the child is responsible for opening, administering and making investment decisions on behalf of the child. While friends and family can make contributions of up to Ł1,200 a year into the CTF, the child will be the only one who can withdraw the money when they turn 18.

The Government has pledged that it will put into place an education programme to get children interested in financial affairs and prepare them to be able to manage their CTF money once they reach 18.

AGE 7

A further payment will be made to each child to link in with financial education in primary schools.

AGE 13

If you chose to invest the child’s voucher and additional contributions into a stakeholder CTF, the provider (unless otherwise instructed) will start to move the investments out of stocks and shares and will gradually move the money into less risky investments closer to the child’s 18th birthday. This is known as “Lifestyling” – mentioned earlier in this factsheet.

AGE 16

When a child reaches 16, the parent or guardian managing the account will cease to be the registered contact. This right will be reserved for the child, however, the child must apply to the provider of the account to take over these rights; they will not be automatically transferred. If the child doesn’t apply there will be no registered contact for the CTF and no statements will be sent out. By becoming the registered contact, all statements will be sent to the child and the child will be responsible for the investment of the money in the account; they will still not be able to withdraw any of the money.

AGE 18

When the child reaches 18, the provider of the CTF will write to the child with a valuation of the amount of money held in their CTF as at their 18th birthday. From that day on, the account will no longer be a CTF. The money will stop benefiting from the tax advantages of a CTF and will be subject to the normal rules of the investment in which it is situated. The child will be entitled to use the money as they see fit (they may, for example, put it towards a deposit for a house or university fees). It is worth noting that, while the parent or guardian can influence how their child uses their money, the final decision rests with the child.

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