Once you’ve started saving the pennies you’ll probably want to know how to maximise your investment. There are many ways to invest your savings that have the potential to provide excellent returns, but deciding which route to take depends on you. You will have to think about:
- The period of your investment
- The level of control you would like over access to the fund
- Your attitude to risk
Child Trust Fund
CTFs are available to every child born since September 2002. The government provides a starter sum of £250 (£500 for low income families), which can be topped up by another £1,200 each year tax-free by parents or generous friends and relatives. The government adds another £250 to the account when the child reaches 7 years. The initial £250 voucher can be invested by parents, or if the parents fail to open an account by the expiry date on the voucher then the HMRC opens a stakeholder account for the child.
There are 3 routes a parent can take with a CTF voucher:
- Put it in a savings account
- Put it in a stakeholder account
- Put it in a non-stakeholder account
savings account
A savings account is the least risky option but is unlikely to perform as well as the other two accounts. The amount that you invest in the savings account will be secure and you will be entitled to receive this amount back plus the interest accrued. There will be charges for this account but these may have been taken into consideration when the interest rate for the account was set.
stakeholder account
Stakeholder accounts are managed on your behalf by a fund manager who chooses the shares and funds to invest in. These types of accounts carry more risk than savings accounts as your return on investment depends on the performance of the companies that your money is invested in. However, your money is invested in a number of companies in order to reduce the risk of losing out if one company performs badly.
In addition, when your child turns 13, your fund manager will move towards a less risky approach and your investment will be placed in a more stable environment such as a savings account. This period is known as lifestyling and offers the security of a nice lump sum when your child reaches 18 years. The charges on this account are also limited to 1.5% unlike any of the other CTF accounts, and the minimum amount you can invest is £10 (although some account providers will accept less than this).
non-stakeholder accounts
Non-stakeholder accounts attract the highest risk and therefore have the potential to deliver the best returns. This type of account is less regulated than the stakeholder account above. There is no limit to how much a provider can charge (usually a percentage of the value of the account) and each provider can state the minimum amount that they will accept.
A stockbroker will organise a portfolio of shares and, unlike a stakeholder account, has complete discretion as to whether they invest in one company or several. There is also no lifestyling phase when your child approaches 18 so your investment is vulnerable to how well companies perform up until your child’s 18th birthday, or whenever you decide to withdraw the funds.
remember ...
that with stakeholder and non-stakeholder accounts the value of your investment depends on the performance of the companies that your money is invested in. The value of shares can go up and go down, and so will the value of your investment. But the longer you have to save before your child reaches 18 the better, as the risk is more likely to even out over such a long period. For every 18 year period in the last 40 years, share based accounts have outperformed cash savings accounts.