Fears over baby savings choice

PARENTS are far more likely to put their Child Tust Fund vouchers into a savings account than a stock market investment. A new survey for the Association of British Insurers, which represents the UK's largest investment companies, reveals that four out of ten parents are most likely to invest their baby's money in a deposit-based account.

Only two in ten will opt for a fund that invests in the stock market, a selection that the ABI says would be 'more appropriate for long-term investments' than a savings account.

Vouchers will begin to be sent out this week. Parents have three options. CTF savings accounts, a stakeholder fund or a non-stakeholder fund. The stakeholder investments will back stock market shares but have annual charges capped at 1.5%. Once the child reaches 13, the money will be gradually shifted into lower risk assets such as corporate bonds.

This system, which is similar to the way pensions work, protects the money in case the stock market plunges in the last few years of the scheme. Non-stakeholder funds, the third option, will not have charges capped, but investors will have a wider choice of funds.

Vouchers must be handed to a bank, building society, investment, insurance or other financial company by April. If not, the Governmenet will automatically invest the money in a stakeholder fund, itself indicative that officials believe that to be the best option.

The ABI research showed 20% of parents were considering a stakeholder account with just 9% considering non-stakeholder accounts. 'To make sure Child Trust Funds grow to their full potential we need to see a concerted publicity campaign from the Government about the long-term nature of these investments,' said Joanne Segars, ABI head of pensions and savings.

'This would empower parents to make informed decisions based on the merits of each type of account.'

Performance figures show returns from shares have beaten cash accounts over the long term. A recent report from analytical firm Standard & Poor's said £1,000 deposit in the average building society savings account in 1983 would have grown to £2,446 after 20 years. By comparison, the UK stock market would have returned £8,626 on the same amount.

Fund manager F&C said it was 'unsurprised' by the ABI's survey but took encouragement that confidence in shares had improved on 18 months ago ? a survey conducted by the company found 67% of parents and grandparents using deposit accounts to save for children compared with 7% backing stock market funds.

However, Jason Hollands, F&C head of communications, said: 'A savings scheme with an 18-year time period is ideally suited for equity-based investments, since equities have historically delivered much higher returns than cash, albeit with higher risks. Given the timescale involved it is reasonable to take on equity market risk.'

Independent financial advisers agree. However, Patrick Connolly of Henley-based adviser John Scott & Partners said parents do not need the hassle of picking funds and monitoring their performance. 'You don't want to find you have to keep moving the money around,' he said. He also warns investors to keep an eye on charges.

Most of the stakeholder funds being offered are linked to index-tracking funds. These funds slavishly follow a particular stock market index. Investors therefore do not run the risk of picking a dud fund. Outside CTFs annual charges can be just 0.3%. However, index trackers that have been launched for CTFs so far tend to charge more than 1%.

Connolly also said the giant F&C investment trust might be worth considering. This has an annual charge of 0.58% and spreads investors' money across stock markets around the world.

A number of financial services companies, such as the Children's Mutual, also sell the unit truts or Oeics of specialist investment companies, wrapped in child trust funds. Investors should seek professional investment advice if they are unsure about picking their own funds.

THE Liberal Democrats, who today launched an election manifesto, are campaigning to scrap child trust funds, instead pledging to spend the money on investment in early years education, reducing class sizes for five to seven-year-old children to 20. The LibDems say the £250m it estimates the Treasury will spend on CTFs annually would be better spent on education now.