Five Million Kids Could Hit The Jackpot

The first round of top-up payments for Child Trust Funds will begin next year. The slump in share prices means millions of kids could snap up a bargain.

Many people still seem a little unsure about Child Trust Funds. There was quite a splash when the system got started in 2005 but it's all been a bit low key since then.

Next year will see a couple of important milestones however. Sometime around the middle of the year, the 5 millionth voucher should be issued. Secondly, from September onwards, the first top-up payments will be made as the first children to benefit from the scheme turn 7.

CTF basics

A quick recap of the basic Child Trust Fund rules may be useful at this point. Any child born on or after 1 September 2002 receives a payment of £250, followed by a top-up payment of £250 on their seventh birthday. Generally speaking, if the child qualifies for child benefit then they should also be eligible for the Child Trust Fund.

The payment can be saved or invested in a tax-free wrapper until the child turns 18, at which point the money is theirs to spend as they wish. Low-income families get £500 at each stage rather than £250 (about one-third of all children get this higher level of payment). In addition, anyone can invest up to £1,200 each year into the Child Trust Fund.

There are three basic choices as to what to do with the money:

• A stakeholder fund which is invested in a share fund but moved gradually back into cash once the child turns 13;
• A shares fund where you can buy and sell shares or funds as you wish; or
• Cash

CTFs by the numbers

So far the stakeholder option has proved to be by far the most popular. About 75% of Child Trust Funds are stakeholders. Cash accounts for 19% and shares make up the remaining 6%.

I think it's quite encouraging that the vast majority of people have taken one of the two stock market options although this is partly because the stakeholder is the default option which the government will open for you if you don't invest the voucher within 12 months.

Interestingly, it's the usually conservative Scots who are least keen on the cash option, with just 13% of them choosing this option last year. Those in the East and South East are twice as keen on cash. Larger families are also less likely to go for the cash option.

As of this April, about £2bn was held in Child Trust Funds and vouchers yet to be invested. This is tiny next to the £78bn and £142bn we have in shares and cash ISAs respectively. But the Child Trust Fund system is still building up steam and the first funds won't pay out until 2020.

One test of our confidence in the Child Trust Fund concept is how much additional money we're investing for each child. In both the 2006/07 and 2007/08 tax years, 24% of all Child Trust Funds had additional amounts invested by families and friends.

As you might expect, lower-income families who get the additional payments are less likely to contribute extra funds. But 14% of them still managed to do so last year and the average amount they put in also increased, from £155 to £172.

Personally, I think these contribution rates are a little disappointing and, given the current gloom, they could well decline in 2008/09. Only 7% of people put £300 or more into a Child Trust Fund and just 1.4% paid in the maximum £1,200.

Some people invest for their children in other ways of course and don't like the stipulation that the child can do what they want with their money as soon as they turn 18. But you don't start to learn about money until you have to deal with it yourself, so the lessons learnt from Child Trust Funds can be just as important as the money put aside.

A great time to be a kid

Although kids born from September 2002 are entitled to Child Trust Funds, the system itself wasn't up and running until 2005. Since this time, the FTSE 100 index has spent all bar the last few months above the 5,000 level and most of the time substantially so.

But with the FTSE now in the low 4,000s, the average non-cash Child Trust Fund is probably underwater by some 20% to 25%. Many people won't get this news until their next statement comes along.

The good news is that is all these kids have at least a decade to make back these losses. There's no guarantee they will but the odds are heavily in their favour in my opinion.

The even better news is that the low level of today's stock market makes putting in extra contributions even more appealing. Some will automatically get seventh birthday top ups but I reckon every parent should seriously consider an additional top up next year. It will be tough for many people to find the extra cash of course but, if you can manage it, even a few hundred pounds could turn out to be money very well invested.

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