Child Trust Fund or Motorbike Fund?

Tomorrow, 1st September 2007, will mark five years since children born in the UK have been eligible for a Child Trust Fund.

The actual scheme didn't materialise under 6th April 2005, but all children born on or after 1st September 2002 will have received a voucher of at least £250 to invest in a Child Trust Fund. Or at least their parents will have received the voucher and then faced the decision about where to invest this generous gift from the State.

The money invested in a CTF remains the property of the child but they can't touch it until they reach their 18th birthday. Households receiving the Child Tax Credit get a voucher worth £500 rather than the standard £250. A further payment is made by the Government on your child's 7th birthday.

Because the CTF is a long-term investment, it makes sense to consider higher risk investments. With more risk comes the opportunity to earn higher rewards. Short term stock market volatility may seem like a bad thing if you need your money tomorrow, but not with 18 years to go.

Apart from where to invest the voucher, the biggest decision faced by most parents is whether or not to top-up the CTF account. Parents, extended family and friends can contribute a maximum of £1,200 a year into a CTF. The money invested within a CTF is largely free of income and capital gains tax. This can make it seem like an attractive investment option; particularly if you have already used up your annual Individual Savings Account (ISA) allowance.

Just remember that when your child gets to 16 years old they can decide where to invest their CTF. That previously cautious managed fund might suddenly be diverted to a series of Japanese smaller company shares by your rebellious teenager. More importantly, they can get their hands on the money from their 18th birthday onwards. Many parents shy away from topping up their children's CTF accounts in fear that it might just become a sizeable motorbike fund at precisely the wrong time!

There is a great article on This is Money today about the best and worst performing Child Trust Funds. Take a look and let me know what you think of my comments on a sensible investment approach for a CTF account.