Gifts of gold, frankincenseÖand a Child Trust Fund

Babies born this Christmas Day may not be bestowed with gold, frankincense and myrrh but they will receive £250 courtesy of the Government’s Child Trust Fund (CTF) scheme. In addition to the Government’s gifts, overall the nation’s children are expected to receive £2.4 billion this year from generous family and friends.

So if you’ve got a new baby or are considering investing on behalf of your kids then MoneyExpert has some advice on the best ways to create a festive nest egg.

Presently wealthy

If you’ve got a new child or have kids who have been given some cash then it’s important to move quickly and work out what you’re going to do with the cash. There are scores of current accounts for example that pay out a measly 0.1 per cent interest, so unless you think carefully about your financial products you could be left disappointed.

How do they work?

The introduction of CTFs by the Government in 2002 has meant that all new born children are given £250 to open a special type of savings account which can then be accessed when they turn 18. You can pay up to £1200 into these accounts each year tax-free.

The simplest type of account is a straightforward savings account which will guarantee any investment made and provide interest on the account. A strong interest rate on a savings CTF is around 6.5%, but there are better rates out there if you look around. Hanley Economic Building Society for example offers 8% interest.

CTF money can also be entered in so-called "stakeholder accounts", which invest in company shares. These accounts expose your money to the stock market which carries an element of risk but the potential returns are significant.

Savings accounts

There are several types of savings accounts you could consider. Firstly there are children’s savings accounts. Amongst the 30 market-leading accounts the average rate of interest paid out is a healthy 6.25% and if you choose carefully you could find yourself with an even better rate.

Unlike CTFs these accounts will give your children easy access to their money, and while you may not want them to be frittering cash away this could come in handy should there be an important purchase they wish to make.

The rates of interest available on these accounts are tempting, with Nottingham Building Society offering 7.5% AER with a minimum investment of just £10, while Halifax’s Children’s Regular Saver pays out a massive 10% AER. It limits you to a maximum monthly contribution of £100 however – and it’s not tax free.

It is also worth asking whether your kids need a children’s savings account if there is a better deal available out there. Savings accounts can be set up in a parents name to ensure that the kids don’t go spending all their cash at once.

Watch the small print

Be aware that some accounts may have withdrawal penalties meaning that you will be charged if you wish to remove cash without advanced notice. The benefit of withdrawal fees is that you will receive a higher rate of interest on your money in return.

A good example of this is the Alliance and Leicester Premier Regular Saver which offers 12% interest so long as you pay in less than £250 a month. The only catch is that you have to give a year’s notice to withdraw the cash. If you do set up the account in your name be sure you can trust yourself not spend the cash!

What is it for?

The key to deciding what sort of account or fund to save with lies in deciding what your child is going to need it for. Is it a fund to see them through university or rather a pot of cash to be used when they want to make the occasional big purchase? Once you’ve thought this through you can work out how often you need to pay into the account to save for your goals.

You can compare savings accounts here to see what suits you best.

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