Whether you think Child Trust Funds (CTFs) are a good way to encourage the savings habit down the generations or an opportunistic vote-winning wheeze, if your child qualifies for a £250 voucher you will probably make use of it.
But this is a brand new venture; there are no track records or comparative tables to consult, so how can you find out about the range of products on the market, or make assessments about their relative suitability and quality?
Lack of professional advice
For a start, you may well find it hard to get professional advice. As Justin Modray of broker Bestinvest points out: "Most financial advisers will be loathe to get involved. The majority of CTFs don't pay commissions (because the providers cannot afford to on a £250 investment) and it would not be practical for parents to pay a fee for advice on a £250 investment."
The Inland Revenue's own CTF website includes a list of all providers. But how to judge which is right for you?
Three different kinds
If you have read up about CTFs, you will probably be aware that the first choice to make is between three basic types of investment.
Cash
If you are very risk-averse, it is possible to open a cash account, which is a bank or building society account paying tax-free interest. What you see in this case is what you get - there are no charges to consider; but you could lose out if interest rates are low and inflation erodes any real returns. You also miss out on the potential of the stockmarket, which historically has outperformed cash accounts over the long term.
The choice, if you take this route, is relatively straightforward. However, only eight providers have signed up to offer cash CTFs.
There is little difference between the various offerings: headline rates are within 1% of each other, though some providers pay a bonus for topped-up accounts or include an introductory bonus in the initial deal, so it is worth looking carefully at the various options before committing yourself.
Stockmarket Risk
If you can stomach some stockmarket risk, you have two alternatives: stakeholder products, where the money is initially invested into stocks and shares but moved into lower-risk assets (probably cash) in the last five years of the CTF, or equity-based non-stakeholder accounts. Stakeholder accounts can charge no more than 1.5% a year; there are no restrictions on non-stakeholder charges.
So far, there is no comprehensive table of either stakeholder or non-stakeholder accounts.
However, it is worth noting that both stakeholder and non-stakeholder fund-based CTFs will be invested in underlying existing funds rather than newly created holdings, so you should be able to get information on the past performance of that unit or investment trust and make decisions on that basis.
Little differentiation
As far as the stakeholder products are concerned, says Richard Eagling, editor of Investment Life and Pensions Moneyfacts, the main problem is that they are all pretty similar - typically FTSE All Share index trackers or balanced managed funds.
The situation is compounded by the large number of distributors - from the Post Office to Mothercare - offering a third-party account. "A number of distributors offer the same product, typically The Childrens Mutual or Family Investments stakeholder accounts," Eagling comments.
Be aware of charges
If you go for the stakeholder option, as well as checking how the underlying fund has performed, look for charges, which do vary from the standard 1.5% in one or two cases. Also check minimum contributions if you may only be able to put away a small amount each month.
Non-stakeholder products
If you prefer the greater investment freedom of the non-stakeholder product, there is only a handful of providers from which to choose so far. The choice of funds available is considerably wider, but you will have to do more homework to establish which of the funds (or self-select arrangements) on offer will suit your needs best, and also how total charges will work out.
For example, F&C offers a range of in-house investment trusts, whereas Reyker Securities' self-select CTF gives access to the full range of unit and invest ment trusts, US, UK and European equities, gilts, bonds and cash.
Charges are not necessarily easy to compare: the F&C annual management charges, for instance, range from 0.3 to 1.5% plus 0.5% stamp duty on each purchase, with a couple of free fund switches per year, while Reyker charges a flat 1% AMC, plus dealing costs for each transaction.
Still need to do your homework
As well as choice, past performance and charges, it is also important to look at the financial strength, consistency and investment reputation of the company offering the account. For the moment at least, there appears to be no convenient substitute for doing your own homework on CTFs - but it should not be long till more guidance is available.
