Make the most of your child trust fund or your kids will count the cost

  • Average cash Child Trust Fund (CTF) standard rate has increased by quarter per cent
  • Rate guarantees disappearing, says MoneyExpert.com*

Choosing the wrong Child Trust Fund (CTF) now could cost your child the price of a new car, according to MoneyExpert.com. The independent financial comparison website warns that although average standard interest rates on cash CTFs are increasing, parents will count the cost of not choosing the right fund.

Moneyexpert.com analysis reveals that families and friends investing the maximum £1,200 into a childís cash CTF each year could be handing over cheques that vary by as much as £6,562 come their 18th birthdays. A maximum of £1,200 each year can be saved in a cash CTF by parents, family or friends on top of the minimum amount of £250 provided by the Government to start the account.

A recent Government audit published last week showed that in the first year of its operation three in four parents eventually opened a Child Trust Fund account. To date around 450,000 cash CTF accounts have been opened, with over £158 million in total balances**.

MoneyExpert.com warns that the difference between the best and worst rates has made choosing the right cash fund increasingly important. The company says that although the average standard cash CTF rate has increased by 0.26 per cent over the last 12 months, rates still vary by as much as 1.75%.

Safeguards against providers dramatically dropping rates are also becoming increasing rare. Only one in three providers offers a guarantee to keep rates above the Bank of England base rate ñ ten per cent fewer than in October 2005.

Sean Gardner, chief executive of MoneyExpert.com, said: ìChild Trust Funds are a fantastic initiative and a great way to build a healthy savings pot for your children. However, cash funds can vary dramatically ñ from the rate of interest they pay to the guarantees, incentives and bonuses they promise.

ìOur analysis shows that cash Child Trust Funds are becoming a bit of a minefield. With fewer guarantees available and with such a variety of standard rates around, parents must choose carefully.”

Parents with a cash CTF can earn as much as 6 per cent tax free on a maximum annual investment of £1,200. But Moneyexpert.com warns that if they were to choose the lowest rate of 4.25 per cent for the same investment, their child could lose out by thousands of pounds when the fund matures. And even if you do nothing more than cash in your childís two Government payouts ñ kids receive a minimum £250 when they are born and further minimum of £250 when they are seven years old ñ the difference between the top funds and the worst could be as much as £264.

Sean Gardner added: ìIf you do nothing more than cash in the voucher and twiddle your thumbs for eighteen years, your kids could be thanking you to the tune of £264 based on the choice you make now.”

Providers that promise not to pay below the Bank of England base rate include Yorkshire Building Society, Britannia Building Society and Leeds Building Society. However, of those only Yorkshire Building Society offers a standard rate above the average 5.16 per cent.

In addition to cash accounts parents with child trust fund vouchers to invest can also choose riskier share-based accounts or stakeholder accounts with a spread of investments.

* Source: Defaqtoís Aequos database ** Source: Building Societies Association

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