Following on from a successful application for Child Benefit, parents automatically receive a £250 voucher for the Child Trust Fund, which the parent has to use to set the account up - you can't cash it in.
When your child is age seven, a further £250 will be credited to their account - so that's £500 from the government.
If you are on a low income, then the figures double. You still receive the £250 voucher at outset, but the government credit an additional £250 to the account on your behalf and when your child reaches age seven, they pay in £500 - so that's £1,000 in total. You don't have to claim for this as the government works out whether you are eligible or not dependant on Child Tax Credits.
Are there any restrictions about how much can be added?
Because the Child Trust Fund has tax benefits, like an ISA or pension, there's a limit of £1,200 that can be paid in during any year. A CTF year runs from the child's birthday to birthday. You will be sent an annual statement a few weeks prior to your child's birthday so you can see if there's still room to pay more into the account.
Another advantage of the CTF is that anyone can pay into it, so you might want to think about donations from family and friends.
What is a stakeholder fund and are there benefits over cash only schemes?
Parents need to choose what type of account they feel best suits them, but the main type of account for CTFs is the stakeholder account. Because the account has to run for 18 years, it makes sense that it's underpinned with equities which tend to grow more strongly than cash over the longer term.
The stakeholder account also has low charges set by the government and allows you to top up from just £10, which other CTF accounts may not. So, it's suitable for most people. In fact, if you don't set the account up for your child before the voucher expires, the government will place it in a stakeholder account for you.
Cash-based CTF accounts tend to be offered by building societies. These are more suitable for very cautious parents who don't want to take any risk with the money. But be aware, by eliminating all risk and opting for cash, you may reduce the end value of the fund. Also, the introductory bonuses offered by many building societies will fall away after a year or two, and then the rate will drop.
What is a child likely to get at 18 if parents paid in all their child benefit?
Child Benefit is currently worth £18.10 per week for the first child and some parents with a high disposable income might prefer toinvest this into their child's CTF account.
If that amount was regularly placed in a stakeholder account and grew at an assumed seven per cent per annum after charges, then your child's fund would be worth just over £27,500.