Switch out of poor-paying Child Trust funds

Parents with money in cash-based child trust funds for their children should check the rates on these accounts regularly as providers have been cutting their rates over the past six months.

New research from financial website Moneynet has found that the average rate on a cash-based child trust fund has come down from 6 per cent in October to a mere 2.38 per cent now with providers such as Nationwide dropping their rate to just 1.10 per cent plus 1 per cent bonus rate.

This drop in rates is linked to the plunging Bank of England base rate which has fallen from 5 per cent in September to its current rate of 0.5 percentage points. But while the rates on CTFs still beat the average returns from instant access accounts which now languish at around 0.15 per cent parents cannot rely on the rates being good.

“Parents need to look at the funds regularly to ensure they are signed up to the best deals for their children,” said Andrew Hagger at financial website Moneynet. “Even if you just want to use the money to give your child a head start you need to make sure that money is earning as much interest as possible.”

The best rate on a CTF at the moment is from the Hanley Economic building society which is paying 5 per cent. However, there is a big jump between that and the next best rate, from Yorkshire building society, paying 3 per cent. Nationwide building society only just 1.1 per cent plus a possible 1 per cent bonus rate if you pay in £250 a year, and Leeds building society pays 2.05 per cent.

Moneynet highlights the importance of switching with the example of a payment of £100 per month into a cash based CTF account paying 3 per cent for the full 18 years. The total would end up as £9337. But at a rate of 5 per cent it would be £3,5696.

“It’s easy to switch from one provider to another,”said Hagger. “All you need to do is sign up with a new provider, who will then let your existing provider know.”

Under the CTF scheme, which was launched in April 2005, a £250 lump sum is given to every child born after 1 September 2002, rising to £500 for children from low-income families. Children then get an additional £250 voucher at age seven, while friends and family can also add up to £1,200 each year.

Parents can decide whether to invest the voucher in a cash-based account, or a ”stakeholder” or ”non-stakeholder” fund - both of which are shares-based. Stakeholder funds invest in equities before switching to safer bonds and cash once the child reaches their teens, while the non-stakeholder funds carry higher charges, but aim to generate more growth through riskier stock market investments.

The deposit accounts work in the same way as an ordinary savings account and so bear no risk of loss. Another benefit of a cash CTF is that you are not subject to any annual management fees which can be as high as 1.5 per cent per year on stakeholder equity products.