cash clinic: the alternatives to a child trust fund
24th July 2010
The Scottish private client team at HBJ Gateley Wareing answer your queries, this week: the alternatives to a child trust fund.
Q I have a grandson, with a grand-daughter arriving next February. I contribute regularly to my grandson's child trust fund (CTF) and had always planned to do the same for my granddaughter when she arrives. With the government's announcement that CTFs will be axed from the end of this year, I am wondering how to save for my grandchildren going forward. Should I still contribute to my grandson's CTF even after the government scraps CTF vouchers?
Are there alternative tax-efficient ways to invest for my grandchildren's future?
A The CTF was a noble idea, aiming to kick start a longer-term savings and investment culture for our children and grandchildren. A £250 voucher was provided to all babies born after 1 September, 2002. For families with lower incomes, a further £250 was paid.
This was available to save as cash in designated CTF accounts or to invest in pooled investment funds. Growth is tax-free and the investments could be topped up by parents, grandparents, family or friends with a maximum overall annual contribution of £1,200. The child was able to make decisions on how their CTF was managed from age 16 but could not access the funds until they reached 18.
The government recently announced that it intends to first reduce and then stop its payments to CTFs at the end of this year. However, private contributions of up to £1,200 a year can continue to be made to existing CTF accounts. There is a campaign to retain CTFs as a tax-efficient savings option, without the voucher payments, but it's considered a long shot. As you can still pay contributions into your grandson's account, provided you remain happy with the underlying account or investment fund, it seems sensible to carry on.
You have various options for your granddaughter. You could open a bank account for her and make payments into this. Interest can be paid gross provided that she is a non-taxpayer.
The account could be in your name and designated for your granddaughter but remain under your control until she reaches 16 (Scotland) or 18 (England and Wales). You could also consider a children's bonus bond from National Savings & Investments. These offer a fixed term return, which is tax-free.
If you were prepared to take a degree of investment risk with the aim of improving longer-term returns, you could also consider investing regularly in a collective investment scheme or regular savings investment trust. Again, the investment could be designated for your granddaughter but remain under your control until she reaches maturity.
If you are worried about a child attaining control of funds at 16, you could consider setting up a trust that specifies entitlement at a greater age.
Glen Gilson is a partner and head of the private client and financial services department at HBJ Gateley Wareing.