Invest Early For Your Children

Millions of pounds is being wasted that could be put towards our childrens' future financial health.

If you've ever looked after a newborn baby, you'll no doubt testify that it's an all consuming task.

So understandably, investing a Child Trust Fund voucher is unlikely to top your to-do list as a new parent. Yet failing to make the most of these tax-free nest eggs is seeing millions of pounds being wasted that could be put towards your offspring's future financial health.

A quarter of vouchers have expired since the scheme began, and only 57% of live vouchers have been used so far this year. These could have collectively amassed interest of £12.9 million if saved in cash over the past 12 months, according to Nationwide.

This year alone, 336,000 vouchers of the 775,000 issued are still languishing around homes, risking being placed into a random fund chosen by the taxman.

How the system works

Child Trust Funds celebrate their sixth anniversary on 1 September. Babies born after 1 September 2002 receive a one-off £250 voucher from the government, with a further £250 top-up for lower-income families, which parents can use to open a CTF account. A further £250 or £500 is paid in at age seven.

Family and friends can contribute to a child's CTF, adding up to £1,200 a year to the government sum. The Children's Mutual says the average account is topped up with £24 a month.

How much can CTFs make?

If you were to invest the maximum £1,200 a year for your child from birth, he or she could be benefitting from a birthday present of nearly £44,500 when they come to celebrate their 18^th, assuming annual growth of 7% after charges.

If you don't actively invest a CTF voucher within a year, it will be invested on your behalf in a default stakeholder account - so it pays to get your skates on and make the best decision for your baby's future investment pot.

Choosing a Child Trust Fund

Most CTF account providers offer cash and equity child trust fund accounts, and parents have three choices over how to invest the money.

If you're particularly risk averse, cash accounts may be the safest option, but it is stock market investments which are proven to produce greater returns over the long-term.

Cash: This is the most straightforward option, being an account that pays annual interest that is free of tax. There are no charges and little risk.

Top cash CTF accounts at the moment include Britannia Building Society, paying 7% AER, although the rate includes a 1.25% bonus for 24 months.

Stock market funds: These are risky, but over time gains should far exceed the returns made by cash on deposit.

Stakeholder: These offer stock market exposure in the early years, switching to lower-risk investments, such as bonds, from the child's 13^th birthday to lock in any gains. They have charges capped at 1.5 per cent a year.

Importantly, remember that CTFs are portable. So if you are disappointed with the performance you can move the money elsewhere.

At 16 the child can take control of the account, deciding how the money is invested. At 18 the entire value of the Child Trust Fund will convert into an Isa, retaining its tax-free status.

From this date some or all of the money in the account can be withdrawn by the child, who has complete control of the money - which could prove a worry if your son has developed a craze for motorbikes!

What about inflation?

Unfortunately, the value of the CTF is not index-linked, so your new arrival will effectively get less than their older brothers and sisters. And the latest surge in the Retail Prices Index means that the gap is ever widening.

Family Investments, a mutual that manages more than 500,000 Child Trust Fund accounts, and The Share Centre, are among those calling for the government to increase the CTF voucher in line with inflation.

According to The Share Centre, babies born today should receive £288 to give them the same start in life as those born on 1 September 2002. I doubt the government will sit up and listen!

In the meantime, don't let your child miss out on the interest and growth that £250 could be earning. If you're unsure where to put it, open up a simple cash based account with the voucher now and you can transfer it to the account of your choice in the future.

More: Child Trust Fund Changes