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What to do with child trust fund cash

Stuart Smith explains some plans especially designed for investing the Government's child trust fund vouchers

Stuart Smith explains some plans especially designed for investing the Government's child trust fund vouchers

It is now over eight months since the Child Trust Fund (CTF) was launched, and in that time over two million vouchers for either £250 or £500 have been issued.

According to official statistics (source: HMRC), however, nearly half of those vouchers are yet to be invested, despite the fact that this is, in effect, free money.If you are a parent who has received a CTF voucher but have yet to decide where it should be invested on behalf of your child, you need to be aware that if you continue to hesitate, the Government will take the decision out of your hands.

Any vouchers which remain uninvested one year after issue will automatically be invested in a stakeholder plan, with the choice of provider being selected in rotation from all those offering such plans.

A stakeholder CTF invests in the stock market, so clearly in choosing this as the default option, the Government is indicating that over the kind of time scale we are looking at, a share-based plan is the preferable option, and is likely to produce better returns than a deposit-based plan. This means that the children of the 25 per cent or so who have opted for deposit-based plans are likely to end up with inferior returns. One of the reasons given for the fact that almost one million vouchers remain uninvested is that it can be difficult to choose between the various plans on offer.

We tend to agree with the Government that over the 18-year term involved, a share-based plan is likely to produce superior returns to a deposit-based plan, even if there will be occasions when the plan sees a drop in value, in line with the fluctuations in value of the underlying assets.In our opinion, one of the best providers of CTF plans is the Children's Mutual, which as the name suggests, specialises in savings plans for children.

Children's Mutual offers three options under its CTF ­ a stakeholder plan, a non-stakeholder plan, and a plan that operates in a manner compliant with Shariah principles.

The stakeholder plan is relatively straightforward, in that all vouchers, and any additional investments you choose to make, are invested in a fund that aims to track the performance of the FTSE All-Share Index. The plan includes 'lifestyling', which means that starting on your child's 13th birthday, Children's Mutual will change the mix of investments held within the plan, gradually moving into assets considered to be lower risk. This is a compulsory feature under the stakeholder plan, which has a maximum charge of 1.5 per cent per annum.

The tracker fund is also an option under the non-stakeholder plan, which in addition allows you to choose between 11 actively managed funds. Perhaps of most interest, Children's Mutual offers a link to the award-winning Invesco Perpetual Income Fund, which has produced consistently above average performance, thanks to the talents of the fund manager Neil Woodford, who is one of the few fund managers to be rated AAA by Citywire.

Lifestyling is also available under the non-stakeholder plan, although in this case it is optional. Charges vary depending on the fund you choose, but average between 1.3 per cent to 1.9 per cent per annum.Children's Mutual has not ignored those who wish to remain true to the Muslim faith ­ the Shariah Baby Bond aims to achieve long-term growth by placing your child's money in an actively managed fund that invests in a range of shares in the FTSE Global Islamic Index. The Shariah Baby Bond is a stakeholder plan that fully adheres to Islamic Law and its investments are approved and overseen by a Shariah Advisory Board.

One feature of the CTF that the Government hopes will be widely used is the facility for parents, friends and family to make additional contributions to the account of up to £1,200 each year in aggregate per child.

To encourage these additional investments, the minimum contribution levels have been set very low ­ just £10 for the stakeholder plan, or either £25 per month or a £250 lump sum for the non-stakeholder version.If you have not yet invested the voucher you have received, or if you have done so but would like to transfer to one of the plans offered by Children's Mutual (perhaps to access the Invesco Perpetual Income Fund), simply complete the coupon below.

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