Investment experts always tell us that over the long-term, stock markets always beat deposit accounts. But figures obtained by the Guardian reveal that parents who played safe and put the government's £250 child trust fund vouchers into building society accounts six years ago are enjoying better returns than those who opted for investment funds.
Someone who put the £250 into a Nationwide Building Society cash child trust fund (CTF) when they were first launched in April 2005 now has a fund worth £330.08. But many parents who decided to gamble on the stock market have fared worse. Family Investments, the biggest child trust fund operator with 1.3m accounts, mostly stock market-based, says it has managed to turn the £250 into only £299.25 so far.
But a survey by the Guardian of the cash-based child trust funds also reveals a worrying collapse in interest rates, with many parents now earning just 1% a year interest on the accounts. Britannia building society (now part of the Co-operative group) offered an eye-catching 6% interest rate to parents on its child trust fund in 2005. The rate was the equal highest in the market, and Britannia immediately grabbed a 14% market share. But now the interest rate paid to children has dropped to 1.05%. Santander, which also offered a cash CTF, is paying even less: 1% interest if the account has less than £750. Across the same period, the Bank of England cut its base rate from 4.75% to 0.5%, so a fall in interest on the cash-based CTFs was inevitable. But whereas Britannia was paying 1.25% above base rate in April 2005, now it is paying just 0.55% above base rate.
Not all the cash CTFs have withered as badly as Britannia's. Skipton building society's rate has dropped to 2.65%, which means it is paying 2.15% more than base rate, compared with the 0.5% it was paying above base rate at launch. Parents are completely free to transfer a CTF from one provider to another, and are allowed to make any number of transfers during the life of the fund.
But which one should you switch to? As with savings accounts in general, many of the cash CTFs have bonuses attached, which expire after one or two years, and are often dependent on the parent meeting various contributions criteria. For example, the top paying CTF for transfers is currently at the Leeds building society. This pays 3.05%, made up of an underlying 1.8% plus abonus of 1.25% if an additional minimum of £600 is paid in during the year.
If you are not planning to pay in extra sums into your CTF, or want a good rate with no strings attached, then the best option is the Skipton's. This pays 2.65% without any bonuses. Yorkshire building society pays 3% interest on transfers into its CTF, but this includes a 0.7% bonus which runs out after a year. The other option is to wait for a rule change and move the money to a Junior Isa. For now, the rules prevent parents switching a CTF to a Junior ISA, but it is expected that the regulations will be relaxed at some time in the near future. Only Nationwide, among the major providers, has revealed its Junior Isa interest rate: 3%, though this has a 0.9% bonus which disappears after October 2013.
Holders of the Family Investments shares-based CTF, which was marketed by Santander, Barclays and the Post Office, will be hoping performance picks up soon. The £400m fund is ranked 109 out of 151 funds in its investment sector over three years, while over five years it is showing a fall in value of 2.1% compared with an 8.1% gain in the FTSE 100. Charges are relatively high at 1.5% a year for what is little more than an index-tracking fund. Other global index-tracking funds such as those run by Vanguard charge 0.4% a year. The Family Investments CTF was initially invested in a basket of shares managed by New Star Asset Management. But the performance bombed versus the competition (as New Star itself imploded) and the contract to run the money was given to Santander Asset Management in April 2009. Investors will now receive returns that track a basket of indices across the world, minus the annual charge.
Kate Moore, Family's head of savings and investments, said: "The CTF is a stakeholder product, which means it has to adhere to set rules, making it more expensive to run than the average fund. For example, regulations require us to annually lifestyle the child's account from age 13 to 18 years, send regular statements to our account holders, manage returns to HMRC and accept no- or low-voluntary parental top-up for a capped charge of 1.5%. Only a small percentage of the 1.5% stakeholder charge therefore is attributed to the management of the fund; the rest covers the administrative cost of running a stakeholder account."
