Child Trust Fund

The Government has started an initiative to try and encourage younger people to develop good savings habits. The aim is for future generations to have some assets available to invest in funding their education or buying a home when they grow up.

All children born after 1st September 2002 qualify for a payment from the Government of £250 or £500 depending on the family's financial situation.

As a parent or guardian you don't need to do anything to apply - once child benefit has been awarded and your eligibility checked, a voucher for the first government payment is sent to you or the child benefit claimant.

This voucher can only be used to open a Child Trust Fund (CTF). It must be lodged with a bank, building society, investment, insurance or other financial company that will establish a CTF in the child's name.

Parents can choose between three different types of CTF for their children; a simple deposit account, an investment fund or a stakeholder account.

• The deposit account is just like a standard savings account with no risk to the money, but with little growth expected over the lifetime of the account.

• The investment fund invests the money in a CTF in the stock market. This exposes the money in the account to risk as the value of investments can fluctuate. The amount of money the account can potentially earn is however much higher than that earned in a deposit account.

• The stakeholder account also involves investing the money in the stock market. Higher risk investments are made in the early years with the money moved into cover risk investments as the child approaches 18. The charges for this type of account are capped at 1.5% a year.

Companies running the CTF are obliged to take deposits from as little as £10. There is a list of registered CTF providers on the Inland Revenue's website.   If the child's parents fail to choose a provider within 12 months the Government will choose one and set up a default stakeholder account.

When the child reaches the age of seven their funds are topped-up with an additional Government payment of £250 or £500 if they qualify for the full Child Tax Credit and their family's income is below a certain threshold. The threshold for 2008/09 is £15,575 and the details for other years can be found on the Government's dedicated CTF website.

CTFs can also be topped-up by relatives and friends of the child by up to £1,200 a year. The money saved in CTFs is not subject to any tax.

Parents are responsible for the CTF until their children reach the age of 16. Children are allowed to control their own fund from this age but have no access to the money until they turn 18. Once the child is 18 they have access to their savings and it is then entirely up to them how they put the money to use.

At 18 the CFT will automatically roll into an Individual Savings Account (ISA), enabling the child to continue saving in a tax efficient manner if they choose to do so.