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Types of Accounts
There are three types of CTF accounts available, each offering different levels of risk and returns. You have the option of choosing an account where your child's money will be safe, but not earn very high returns, or of choosing a riskier account that has the potential to deliver a higher return.
Savings Accounts offer the highest levels of security and are similar to bank and building society accounts. By investing in a savings account you can rest assured that your child will get back whatever amount has been invested, in addition to a certain amount of interest that would have accrued.
However, with a savings account the money you invest is not likely to grow very much. This is the compromise you have to make for the security that you are assured. Investing in an account that invests in shares will perform better in the long run provided market conditions are favourable. There is also the case of inflation. Since prices rise every year, the money in your account may lose its value over a period of time. For instance, £20 today is worth more that it will be 10 years from now.
Stakeholder Accounts invest the money in shares of different companies. A set of rules have been implemented by government to reduce the risk of investing in shares. To begin with, rather than put all your eggs into one basket, your money is invested in the shares of multiple companies. Secondly, when your child reaches the age of 13, a part of the money is moved out of the share market into low risk investments and assets such as cash. How much of the money is moved will depend of how well your shares are doing at that point in time. Therefore, although your child's money may not grow that much anymore, it will be safe from stock market fluctuations.
The charges to be paid to the provider for maintaining a stakeholder account is limited to no more than 1.5 per cent per year. This means that you will have to pay no more than £1.50 for every £100 you have in the account. The service charges for the other types of CTF accounts are not limited in this way.
Stakeholder accounts also seem to be CTF account type favoured by the government. In case you do not open an account within one year of receiving your voucher, the government will open a stakeholder account for you.
Equity accounts, like stakeholder accounts also invest your money in shares. However, unlike stakeholder accounts, the money remains in the stock market throughout. It is not moved out of the market or converted to safer investments or assets. This makes it the most high-risk of all the three CTF account types, and it works best when money is invested for a long time.
On the plus side, one must remember that poor performance in the stock market in one year can always been made up by a good performance in another year, and over an extended period of time the stock market's value usually increases. However, there is no safety measure taken to guard you from losses and there is no guarantee that shares will continue to be the best long-term investment option in the future.
The charge for this type of account is usually a percentage of the overall value of the account. The percentage amount varies from provider to provider. |
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