Children feel the crunch as trust funds take a hit

Published on Saturday 8 November 2008 16:43

THE past few months have been miserable for millions of savers who have seen the value of their pension pots and rainy-day funds plummet in value amid the current financial crisis, writes Nic Cicutti.

Yet one group of savers facing a similar experience has barely received the same level of attention: young children, whose Child Trust Funds (CTFs) are worth much less than when the investment was made.

CTFs were launched by the Government in September 2005, although children born from September 2002 onwards have also benefited. In total, some 3.3 million CTF vouchers have been issued.

The aim is to encourage saving by giving all kids a 250 voucher that can be invested on their behalf, followed by a second 250 voucher at the age of seven. The money grows free of tax and the fund is cashed in at 18.

But for many youngsters – and their parents, relatives and friends, who can chip in an additional 1,200 a year into the CTF – the experience so far has been depressing.

A 250 CTF voucher invested a year ago in the Gartmore Cautious Managed Fund would now be worth around 220, according to fund analyst Morningstar.

Similarly, many CTFs are invested in so-called tracker funds, which follow the performance of the FTSE All-Share index of UK companies. One of the most popular CTFs that does just that is offered by Nationwide as part of its "stakeholder" range of CTF products.

Yet investing in an All Share tracker CTF in November 2005 would have resulted in the value of that 250 voucher dropping to around 200, a fall of 19%.

The children who are likely to have suffered least are those whose parents didn't have a clue which fund to invest in and simply chose a standard savings account for their kids' money. Nationwide's Cash CTF currently pays up to 6.1%, including a bonus.

David White, chief executive at the Children's Mutual, says that while it is true that fund performance has suffered in the past 12 months, most parents understand they are investing for the long term.

"Parents have seen the headlines on the financial crisis and economy and understand it is a bigger issue than fund performance. If you had invested in a CTF 18 years ago you would have doubled your money – and that is despite market crashes in that time."

Not only are parents unconcerned about the performance of their children's CTF schemes, they are maintaining their own contributions into them despite the credit crunch.

According to Family Investments, another friendly society specialising in CTFs, parents are even prepared to make cutbacks in other areas of spending rather than stop saving for their children.

The society's own survey of parents found that most felt any disposable income in the current economic climate should be put towards long-term investments as opposed to luxuries and treats, including holidays.

Kate Baker, head of savings and investments at Family Investments, says: "In our experience, saving for a child's future is a parental obligation, so when things are getting tough this is the last area that parents are willing to cut back on."

Even so, some parents are so hard up that they will have to stop CTF contributions.

A recent survey by American Express Insurance Services found 21% might halt their investments into CTFs if the going gets too tough financially.

CTF facts

• A Child Trust Fund is a savings or investment account where your child can withdraw the money when they turn 18.

&#149 Your child receives a 250 voucher to start the account.

&#149 Money cannot be taken out of the CTF once it has been put in.

&#149 Up to 1,200 a year can be saved in the account by parents, relatives or friends.

&#149 The Government will make a further contribution when a child is seven – all eligible children will receive a further payment of 250.