CHILD TRUST FUNDS: INVESTING IN YOUR CHILD'S FUTURE

THE THREE OPTIONS

Option One – Bank or Building Society Savings Accounts

This is the lowest *risk* option. The value of the account can never fall below the amount originally invested. So, if you deposit the £50 CTF voucher, the money in the account will never be less than £50. That £50 will also earn interest every year, so this option guarantees that the value of the account will grow over time. But there is a chance that this option may offer smaller growth than the other investment options available (see below, Case Study: The Random Family).

Another downside is that inflation (when the price of goods and the general cost of living rises) can erode the real value of the money in the account over time. £50 will always be worth £50, but it may not buy your child as much in 18 years' time as it will today.

Option Two – Shares, bonds or a mix of the two

This option does involve some stock market risk to your child’s money, but because it has to be invested for at least 18 years, it is likely to provide more money for your child than if you put the money in a savings account.

It is also the most flexible option, as it gives you a number of investment choices. For example, you may choose to invest the CTF voucher directly in the *shares* or *bonds* of just one company, or you could invest in a number of different companies. Alternatively, you could invest the voucher in an investment fund. This option will give you access to a professional manager who will choose a range of shares and/or bonds on your behalf. 

Option Three – Stakeholder Accounts

This option involves investing in a mix of shares, bonds and cash chosen by the company managing your child's money. However, unlike option two, it uses an investment strategy called ‘lifestyling'.

Lifestyling allows the fund manager to invest in riskier assets like shares in the first few years after opening the account, as these are likely to provide the highest returns over 18 years. However, as your child approaches their 18^th birthday - when they will be allowed to get access to money in their CTF account - the investment manager will move the money out of riskier assets and into safer investments like bonds and cash. This is to protect your child's CTF from any sudden market falls, which might reduce the value of the fund at a point when they want to cash it in.

The annual charge on this option is limited to a maximum of 1.5%. This means that there will be a charge of no more than £1.50 a year for every £100 in your child's CTF account. The charges on option one and option two are not limited in this way by the government, so you need to check what the CTF provider will charge.    

If at any time you are unsure about how much risk you are prepared to take, or if you need further information on the range or products available, you should contact a financial adviser (see IMA's Find a Financial Adviser at: /investors/ifa.asp).