In 2010 the Child Trust Fund (CTF) was scrapped by the coalition government. Its replacement in the autumn of 2011 will be a UK government junior ISA.

This will at least give a tax efficient alternative to the Child Trust Fund for parents that want to build up a nest egg for their children.

The CTF was set up by the government in order to give all children a financial head start in life. It encouraged family members to save on behalf of children with two £250 contributions from the government.

There were different variations but at its core, the CTF was much like a Cash Isa where the savings interest was tax free.

This was a very simple and safe option for investment if you were not comfortable with the idea of investing the money in stocks. Outside of the core cash component, one of the best child trust fund bolt ons was a a stakeholder fund and a share based fund.

How did the Child Trust Fund work?

The Stakeholder fund

The CTF stakeholder fund was a little riskier than the cash accounts. Even though it invested in shares, there were a few conditions that had to be met in regard to the investment type allowed and the spreading of risk across different sectors. The idea was that when the child turned thirteen, the fund would be transferred to something not as risky.

The Share fund

There were mainly two types of share based accounts. The first one offered access to limited investment fund ranges where you would switch between different funds whenever you liked. The second fund worked on a self selection basis where you would be able to select just about any fund that you want. There was a large range of providers and you were able to purchase the shares directly.

Why did the government scrap the Child Trust Fund?

One of the CTF providers, the Children’s Mutual, found that 50% of CTF accounts received additional contributions from friends and family. Figures from the Tax Incentivised Savings Association put additional contributions into CTF’s at £14.4 million every month giving am average contribution of £22.50 per account

It is estimated that the government will save £320m this tax year and £520m in the 2011 tax year by dispanding the scheme. Although the CTF was well intentioned, it is difficult to know exactly what it would achieve as the sums involved are not life changing.

Where to find the best child trust fund?

A good place to start looking, are bank and building society accounts targeted at children aged up to 16 years old. These accounts are structured to encourage saving. For example, with the Halifax children’s regular saver account, a minimum of 12 consecutive payments must be made of between £10 and £100.

These accounts are also tax efficient as children receive a personal allowance. The parent only has to complete an R85 form and give it to the account provider to benefit from this tax allowance.

Tax free Children’s savings bonds are available from the Governments National Savings and Investments. The bonds pay a set amount of interest for a fixed period with a bonus paid upon maturity of the bond which is five years. The amount that can be invested in these bonds is a maximum of £3000 per issue.

Some of the listed Investment Trusts offer child savings schemes. These include Baillie Gifford and Fidelity. To attract Child Saving they usually have a lower minimum monthly contribution requirement as well as lower set up and management fee charges.

As a really long term investment it is also possible to set up a stakeholder pension for a child. The maximum amount that can be invested is about £3000 which the government will top up with basic tax relief. The only problem with a stakeholder pension

David Cameron finally confirms the Junior ISA launch at the March Budget

is the child will have to wait until they are 65 years old to benefit from the pension pot.
What about the government’s proposed new junior ISA, a tax free savings plan to replace the CTF.

The UK  government savings account Junior ISA has a projected launch date of Autumn, 2011 is largely expected to have a similar monetary ceiling to that of the best Child Trust Fund (CTF), the only difference is it will not have the government contribution that the CTF gave to each child upon entrance into the scheme.

The UK Treasury have said the new product will be backdated to ensure that no child born too late to get a CTF will miss out on the new UK Junior ISA

It is estimated that around 5 million children in the UK have had CTF’s opened at some point since the scheme was launched in 2002.
Existing CTFs will continue until they mature on the child’s 18th birthday, contributions can be continued to be made into the fund up to a ceiling of £1,200 a year.