Child Trust Fund freebies!

If you're struggling to decide which Child Trust Fund to choose, you may find the free gifts appealing - but are these funds the best places for your child's cash?

The stockmarket's woeful performance of late has left many of us retreating at speed. So much for the old adage that stocks and shares are the best home for your money if you want high returns - anyone about to retire is likely to tell a very different tale.

And any new parents trying to decide where to put their tiny baby's £250 Child Trust Fund (CTF) voucher are bound to be very nervous. After all, it is one thing to take risks with your own money, but when it comes to your child, the pressure is really on to get it right.

Choices

The £250 CTF voucher is sent to the parents of every new baby in the UK (once they've registered for Child Benefit). It can be deposited into either a cash based CTF (like a savings account), or a shares-based account.

Alternatively, parents can choose the stakeholder option, which invests into a fund that buys into a range of companies. It has capped annual charges (no more that 1.5%), a lifestyling feature (which moves the money into less risky investments when the child turns 13) and minimum monthly contribution of £10.

An additional £1,200 can be added to your child's CTF each year, tax free. And incidentally, if you don't manage to open your child's CTF account within 12 months, the government randomly picks one of these stakeholder CTF providers on your behalf and deposits your child's money into it.

Which to choose?

So which route should you choose? Unsurprisingly, cash tops the bill for many, particularly at the moment. After all it's straightforward, simple to understand and (hopefully) safe.

But as a CTF can't be touched until your child turns 18, many parents feel it's worth taking a bit of a risk in the hope of higher returns. Indeed, information from the government's Child Trust Fund site itself states that "historically, over an 18-year period, accounts that invest in shares almost always do better than savings accounts".

Shares obviously offer potentially the greatest potential for high returns, as you can choose adventurous, high risk funds. However, as there is no capping the fees can be hefty, with many charging a 3% to 5% initial fee, in addition to the 1.5% annual management charge, which eats into any potential profit. What's more, deposits often need to be heftier, with many requiring £100 minimum lump sums.

If you're more risk averse you could choose a stakeholder CTF. The money is still invested in the stockmarket but as charges are capped your child will keep more of his profits.

Freebies

Of course, if you were to add the maximum £1,200, per year, into a newborn baby's CTF you'd be looking at an investment of over £21,000 over 18 years - a pretty hefty sum.

Fund providers are well aware of this fact and in a bid to entice you open your CTF with them, some are even currently offering inducements.

Take out a Family Investments Stakeholder CTF (you can also do so through the Post Office) and if you arrange to pay in £20 or more, per month, you'll receive £25 Boots gift voucher (pay in less than £20 and you'll receive a £15 voucher).

And open any of The Children's Mutual's CTFs (shares based or stakeholder) online, and provided you set up a direct debit of more than £10 per month you'll receive £30 of Mothercare vouchers. Do so by post or over the phone and you'll get £20.

What's more, anyone else who sets up a direct debit for your child of more than £10 will also receive the vouchers. So grandparents and friends have an incentive to get involved!

Watch out

However, as with all financial products, it pays to do your research before jumping in, particularly if looking at the shares based options. For example, a £30 voucher may not be so appealing if 5% of your child's profit is eaten up in charges straight away. 

Personally, I think if you're really keen on a shares based CTF, a better option is to ignore the freebies and look around for an independent financial adviser who can refund some of the initial charge instead.

Snap up the freebies and leave

Alternatively, as you are free to transfer your child's CTF around as much as you want, you could open one of the accounts offering inducements, collect the freebies and transfer to another provider as soon as you can. But of course, this is a risky strategy that could cost your child in charges.

Good option

If you want an easy - and good option - you could do worse than choose a simple, stakeholder tracker fund. With a capped annual fee and a low (or no) initial charge your child gets to keep more of his profits while still being exposed to the stockmarket. A good option is the F&C Stakeholder CTF (a FTSE All share tracker) which has some of the lowest charges and no exit fees.

If you're happy with the non-stakeholder route, the Share Centre offers the chance to  invest in individual shares, as well as add to the investment monthly.

So if you're looking to open a CTF for your child, don't automatically be swayed by the freebies. Check out all the options, decide on the type of account that suits you best and choose the right one for your child.

And remember, you can always transfer between providers at a later date. If you need more time, open a Cash CTF and move the money later - at least it will be earning interest while you're deciding (Moneyfacts table-topper Hanley Economic BS currently pays 5%AER).

And as a final note: By signing up with cashback website Kidstart you can earn free cash for your child's CTF when shopping online.

More: 10 Things to know about Child Trust Funds | How to maximise your child's tax-free savings

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