Picking the best child trust fund

Posted on: 14 April 2009 by Gareth Hargreaves

Independent financial advisor Peter McGahan addresses the issues of child trust funds and selecting the best scheme.

My granddaughter has received her child trust fund money and my daughter wanted to know what to do with it. I was also thinking about adding to it, so wondered if you had any thoughts on the better schemes and child trust funds in general.

Firstly my thoughts on the child trust fund: It’s no surprise this idea has been met with considerable disinterest. I do wonder what the government’s motivation for this type of scheme was. The child trust fund was introduced back in 2004 and in the last five years I can count on one hand the level of enquiries I have received. The child trust fund was introduced to encourage people to save for their children.

Its lack of success may be down to a couple of factors but most will be because of this on: At age 18 you do not know how your child will turn out. Will they be responsible with their cash or will they be wasteful?

Someone saving £1000 per year and with reasonable growth might expect their child to receive over £30,000 at age 18. Worse still, you have no control over what they will do with it and how they will be thinking. I suspect from an early age most will know they have a fund and could easily rely on that.

Is it possible schoolwork/study motivation might fall away. Personally I was always taught to reward for the right behaviour. In the above scenario they are being rewarded for just reaching age 18. I’ll leave you to think about the numerous downsides to this happening but will focus on what I would choose to do rather than use a trust fund.

Some people like to budget i.e. a pot for this and a pot for that. I like to save in the most tax efficient way then decide later who gets what. If I saved into an offshore bond for example, the capital would grow completely free of tax (apart from a small element of withholding tax).

When you encash the bond there is a potential tax charge but with careful mitigation there may not be any tax to pay.

Let's say you save into an offshore bond for 18 years. Now your granddaughter decides to go to university or even decides to take a gap year out for a holiday. You can now make the decision to support her in that or not, depending on your views of the situation.

If you decided to support her you could then take a segment of the bond and assign it to her and then encash it. Because of the way bonds are taxed there is likely to be no tax at all. As long as the gain on the segment of the bond is less than the personal tax allowance there would be no tax.

Given that at university or holiday it’s unlikely your granddaughter would be working; there would be no tax at all. And so you save free of tax with tax free withdrawals and this can be done whenever, and for whomever you choose.

Because it’s your pot of money you could also use current legislation to encash tax-free. If you became non-resident for a year you could then encash the bond free of UK tax. All with total control.

Don’t worry too much about the term offshore. Offshore insurance providers are simply a version of the onshore companies you will be used to dealing with like Standard Life for example. They just hold offshore status so the capital grows in the most tax efficient manner. Your protection does not have to be inferior to the UK company.

If you decide however, that a child trust fund is for you, consider that a stakeholder plan is cheaper and has a small range of funds but for the small amount of capital involved this may be fine.

Child Trust Fund (CTF) is a savings and investment account for children. Children born on or after 1 September 2002 will receive a £250 voucher to start their account. The account belongs to the child and can't be touched until they turn 18, so that children have some money behind them to start their adult life.

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