Page last updated at 14:03 GMT, Thursday, 5 April 2007 15:03 UK

Q&A: Child Trust Fund

A mother and baby
New born babies receive vouchers worth at least 250
The government gives all newborn children a minimum 250 in a Child Trust Fund, hoping this will encourage saving. BBC News explains how the scheme works and what is it really worth?

Free money sounds too good to be true. What is the big idea?

The government will give 250, rising to 500 in the case of low income families, to all newborn babies.

The money will not be available to the child until they are 18, by which time it is hoped the Child Trust Fund (CTF) will have grown into a tidy sum - perhaps enough to make a decent contribution towards university tuition fees, occupational training or a deposit on a home.

Parents looking to open a spread betting account on behalf of their child can forget it.
In addition, the government has promised that it will make a one-off payment into all Child Trust Funds when children reach the age of seven. The amount of that sum has yet to be announced.

How far will 250 go?

It will fall a long way short of funding a university education - particularly when you consider that the average student now leaves university with debts of more than 12,000.

Virgin Money says that if the full 500 was invested and grew at 7% per year the Child Trust Fund would be worth 1,410 after 18 years.

But the idea is that additional contributions from friends and family will bump up the fund so it can give young people a real head start.

Family and friends will be able to contribute up to 1,200 a year.

What the Child Trust Fund could be worth
500 with 5% annual growth would become 1,000 in 18 years
500 with 7% annual growth would become 1,410 in 18 years
500 with 9% annual growth would become 1,970 in 18 years
Source: Virgin Money

Virgin Money estimates that if parents or grandparents top up the fund to the tune of 10 per month the amount saved would grow to 5,210. And if parents paid their weekly child benefit into the fund, the fund would have grown to a substantial 27,000 after 18 years, presuming (an optimistic) 7% annual growth.

Will the taxman be able to claim a slice of the fund?

Any growth achieved by the Child Trust Fund will be tax free.

But those paying in to Child Trust Funds will not receive tax relief on their contributions.

The government has also decided that current rules governing parental gifts to a child will not apply.

This is where a gift from a parent gives rise to income of more than 100 in a year and the parent is then taxed on all that income at their own tax rate.

Are there limitations on how the Child Trust Fund can be invested?

Yes. Parents looking to open a spread betting account on behalf of their child can forget it.

Following the stock market falls of recent years many commentators thought that the government would bar parents from investing the money in shares.

However, following lobbying from the investment industry, the government has decided that parents can invest in either a deposit savings account or a stock market-based investment.

But any stock market investment will have to be low cost and not too risky.

What if I fail to invest the cash?

Parents that do not invest the government's gift within a year will have it invested for them by HM Revenue and Customs.

The parent is free to assume responsibility for that account later at any time, if they wish.

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