| Which is better - Child Trust Fund - or regular bank account?

Which is better - Child Trust Fund - or regular bank account?

savona_winds asked:

Hi,
I’m expecting a baby - can you tell me which is a better deal?
Do I open a Child Trust Fund? The govt gives me £250 then I can put in £1200 a year - tax free - for 18 years and the money is locked in with no interest.
OR
Just open a regular bank account (I can be very disciplined with payments), earn interest, but pay tax.
Appreciate your time,
L.
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Comments

One Response to “Which is better - Child Trust Fund - or regular bank account?”

  1. Serge M on May 29th, 2009 9:01 am

    You don’t provide enough information. Does this happen every year or just once? I’ll assume you invest 1,200 and the government adds 250 each year for 18 years. The fund would accumulate 26,100

    Now let’s assume you invest 1,200 each year at 6 percent but you have to pay tax on that so it leaves you only a 4% increase. After 18 years the fund would contain 30,868.

    To match the government fund, you could earn as little as 2 percent per year after tax. Anyone can do better than that. The advantage is that you would have the money available all the time. Suppose your child is a prodigy that starts college at age 15?

    The point is that after about 5 years you could invest the money in a CD and earn even more interest. The government plan is obviously for undisciplined people who would spend the money if they did not take the benefit. It would be a great plan if it included some interest. but with no interest to compound, it only looks good.