Having read through some information sent to me by The Childrens Mutual, and done some more digging, it looks to me like non-stakeholder CTF accounts (which are the only option for those wanting a truly ethical/eco investment), seem to offer very poor value for money — and even stakeholder accounts aren’t that great. If you intend to put aside a regular monthly payment for your children, you might be best to put it somewhere other than a CTF account.
I am not a financial adviser, and I don’t really claim to understand 100% how these investments work (in fact I knew very little about investment methods until this little project). The following is what I believe to be true, but I am in no way responsible for your investments and if in doubt you should consult an IFA.
CTFs are front-ends for OEICs
Both stakeholder and non-stakeholder accounts are mostly invested in OEICs, Open Ended Investment Companies, which have largely replaced Unit Trusts and are quite similar. In both cases, your money (minus charges, see below) is pooled into a fund, and a fund manager decides where it should be invested according to the “investment objectives” of the fund — things like which countries, whether it concentrates on “high risk” or “lower risk” investments (eg shares or gilts), whether it has any ethical or environmental policy etc (as we’ve already discovered, very few have the latter).
Charges, charges everywhere
The charges taken by companies for managing these funds are deliberately obfuscated. It seems simple enough: there’s a percentage initial charge and a percentage annual management charge. Unfortunately it’s not that simple — there are other deductions which they don’t even have to tell you about! This is completely ridiculous if you ask me.
Most fund providers do now publish the TER, Total Expense Ratio, in their “Key Features” brochure. This figure is independently calculated and covers all the annual charges and deductions, including the mysteriously secret ones. So when comparing one fund’s charges with another, look at the Initial Charge and the TER, but remember that because the TER is annual, small differences in percentage terms can add up to a large difference in value over 18 years, compared to the initial charge. On the other hand, the initial charges can also add up if you move from fund to fund instead of sticking in one place.
Apparently the secret hidden charges can vary over the life of a fund, again without anybody telling the investors. Those crazy fund managers, what will they think of next?! So at best the TER enables you to compare the situation right now, and you’ll have to keep an eye on your annual statements to see whether anything has changed.
Most of this information comes from Fitzrovia, who have been compiling and comparing TERs for some years.
Stakeholder or Non?
It would appear that the 1.5% maximum charge for a stakeholder CTF does refer to the TER, which makes it cheaper than the majority of non-stakeholders whose TERs typically range from 1.54 to 1.84%. The non-stakeholders also have an initial charge of around 5%, which the stakeholders do not. Stakeholder accounts also accept a minimum contribution of Â£10. Most non-stakeholders, in common with most non-CTF investments, ask for a Â£50 a month minimum, so this may not be an option for some people.
Non-stakeholder CTFs so far look like poor value. It is possible to invest in exactly the same funds at much lower charge rates. For example, if you put Â£50 a month into a Childrens Mutual Baby Bond Choice (non-stakeholder CTF) invested in the Insight Evergreen fund, you will face an initial charge of 5%. But Smile offer an ISA in the same fund with an initial charge of just 2.75%. You can also invest much more in an equities ISA than you can in a CTF (if you have the money to do so!).
Other problems with CTF Accounts
The majority of CTFs are likely to be invested in just a few funds, so those funds may have quite a large chunk of their value derived from CTF accounts. I think this is going to cause problems in 13 years time when “lifestyling” begins, and/or in 18 years when the first payouts start. Funds which are heavily exposed to CTF are going to lose value if there are fewer new accounts being opened than are being closed — which there will be if the birth rate continues to fall, or if CTFs are abolished by a future government.
Overall you have very little control over CTF accounts. You can “opt out” of lifestyling but otherwise you can’t change the dates on which selling happens — it will be on the child’s birthday or thereabouts. In the market, timing is everything. Also, although it is your money being invested in companies, you get no voting rights and typically the OEIC does not exercise voting rights on your behalf. It all adds to the feeling that these are purely theoretical money instruments with little connection to reality.
Alternatively: Keep the investment in your name
Holding a tax-free investment (such as an ISA) for your child in your name, rather than theirs, has some advantages:
- You can get at it in an emergency.
- You have greater control over when to sell the shares (ie wait for the market to be right)
- You decide when to give the money to your child (it could be before or after their 18th birthday), whether to do so all at once or in instalments, or to use it to pay for things that they need rather than giving them a load of cash to fritter…
The potential problem with having the money in your name is the tax that they will be liable for when you hand it over. This can be reduced or escaped by paying instalments rather than a lump sum, or perhaps by buying goods instead of handing over cash (strictly not, but in reality, gifts of things are eminently less easily taxable than gifts of money — and probably more useful too.)
Designations and Trusts
There are ways of investing in your child’s name if the above doesn’t appeal for some reason — you can designate a Unit Trust/OEIC/Investment Trust, or you can set up a bare trust or an accumulation and maintenance trust. I’m not clear that there are any tax benefits to designation, while setting up trusts is really a job for a solicitor.
Are Funds even any good?
Motley Fool doesn’t think so. It recommends a tracker, and claims that the vast majority of funds fail to even keep pace with the bulk of the stock market. From what little I know, my impression is that promoting trackers is a self-fulfilling prophecy — there are now so many investments that track, say, the FTSE100, that there is effectively a big safety net around the companies in the index (quite apart from the fact that they have been judged solid enough to be in the index in the first place). On the occasions that a company falls out of the index you can witness its share price plummet as all the trackers ditch it. It’s a bit mercenary. More importantly for me, trackers aren’t ethical, they invest in what they’re told to invest in by higher powers.
I do suspect they may be right about most funds being useless, and most fund managers too. Fund managing is based on the questionable hypothesis that it’s possible to predict the ups and downs of company shares by research into the company, whereas it seems to me that the most movement of share prices is caused by fluctuations in the market as a whole, and predictions based on chartism, luck, chance or chaos theory may be just as successful (or not). Remember the only people who make real money are those at the top, and we’re at the bottom.
Overall you have much more choice outside the CTF system; with an ISA you can choose pretty much any fund or even deal shares directly — be your own fund manager! (Be aware that this is high risk and the transaction charges will soon add up if you do a lot of trading). There are also investment trusts — these are not available within CTF at all, but I have seen them recommended for reasons such as lower charges. These are my next target to investigate.
Then there’s always a deposit account. Lower risk, lower returns. Less favourable tax treatment too. I would always hold a deposit account for a child as well as an investment, just in case, but I don’t think it makes sense as the only option for a long-term investment.
Although the government contribution has to go into a CTF account, if you want to put extra money in, and can commit to at least Â£50/month, it may be better not to put the extra into a CTF account at all. This is especially true if you want control over how your money is used (both by the companies being invested in, and by your children!) Cynically, the CTF is just another example of collusion between the government and the City to make more money for both at our expense. It certainly appears that there are much better ways out there to invest (financially and morally) for your children’s future.
But to give credit where it’s due, the stakeholder CTF is substantially more accessible and with lower charges than many investments. If you want to put in less than Â£50/month, it may be the best value investment around. It’s just a shame that there is currently so little choice about where the money goes.