A long-term view will pay off for children's savings

The Fund is available to all children born on or after September 1

2002. The carrot is a Government voucher worth 250 (raised to 500 for families receiving full Child Tax Credit) and the same sums again on a child's seventh birthday.

Each year anyone can pay in up to 1,200. This can be a parent, grandparent, godparent or just a friend. It may be on a regular basis – such as monthly or quarterly – or by a lump sum.

If someone prefers to make an outright gift, particularly if they are elderly and wish to avoid as much inheritance tax as possible, they can ask a stockbroker to accept a larger sum and drip-feed the maximum permitted each year. Such money could be held in an ultra-safe investment like a Government bond.

The money cannot be accessed until the 18th birthday although it can be moved to another provider if it is under-performing. That's why it is important to review how the money is performing, at least annually.

By saving over such a time, with modest growth and after 1.5 per cent charges, it could exceed 31,000, which could provide a first car, deposit for a property or go a long way towards university costs.

The latest Revenue & Customs statistics show that 71 per cent of parents choose where the money should be invested. After one year, children whose parents ignore the free voucher have the sum invested on their behalf.

About half who opt for The Children's Mutual, one of the major providers, immediately start saving on a monthly basis to help their youngster. On average, 24 a month is contributed, equivalent to 288 annually.

Each month over 22m is being added. "This is evidence of a burgeoning savings culture," says John Reeve, chief executive of Family Investments, which launched in 1975 and now hold over one million Fund accounts.

Before the Fund, only 18 per cent of parents held savings on behalf of their children.

Child Trust Funds now account for over 2bn. There are three choices:

n Equity or stock market, taken by nine per cent;

n Stakeholder, which is the option taken by 68 per cent;

n Deposit, which is the choice of 23 per cent.

The deposit or cash account is the easiest to understand with 13 providers. It is not risk-free and should carry a warning that you may receive less in real terms than you invested. The interest rate may be so low that it falls below the rate of inflation, effectively devaluing the investment.

Inflation hit 2.9 per cent in December, up from 1.9 per cent the previous month. Yet providers pay only 0.5 to 3 per cent interest (Yorkshire Building Society is highest which includes 0.70 per cent bonus for the first 12 months) with the exception of five per cent from branch-based Hanley Economic Building Society.

Several offer bonuses if extra money is subscribed for the first two years. As there is no withdrawal fee, it may be worth switching. Yorkshire Building Society says that only 52 per cent of parents realise they can transfer.

The stakeholder account invests in the stock market initially and from about the 13th birthday gradually moves the money across into bonds and cash. Such 'life-styling' is designed to reduce risk in the last few years.

With a stakeholder, there are no entry fees and the maximum annual charge is capped at 1.5 per cent. Rather than opt for a managed fund, the money is usually placed in a tracker which tries to replicate a particular equity index, such as the FTSE 100 (as with Halifax) or FTSE All-Share (as with F&C).

One choice is ethical funds, which avoid companies with a poor environmental record or which derive a significant revenue from arms or tobacco.

From launch to November last year, Investment Life & Pensions

Moneyfacts reveal that the CIS UK FTSE4Good Tracker grew just 7.99 per cent and the Family Charities Ethical Trust actually fell minus 3.84 per cent whilst the average stakeholder rose 13.83 per cent.

The same survey shows that the stakeholder stars were:

n F&C FTSE All-Share Tracker up 22.76 per cent;

n Legal & General UK Index (tracks FTSE All Share) up 22.54 per cent;

n Legal & General (N) Tracker (follows FTSE 100) up 19.30 per cent.

Equity or stock market accounts are usually collective funds, such as investment trusts or unit trusts. This is not for the risk-averse as there will be volatility over 18 years but also the opportunity for good growth with no income tax or capital gains tax liable. The income of the fund though is subject to corporation tax.

F&C offer 14 investment trusts including its flagship Foreign & Colonial which has a global spread with a core UK holding and has risen 46.7 per cent in five years. Their other notable examples with returns over the same period are F&C Global Smaller Companies (up 53.7 per cent), Pacific Assets which excludes Australasia and Japan (up 79.2 per cent) and F&C Private Equity which is invested in unquoted companies worldwide (up 211 per cent).

Charges run from just 0.3 per cent which even with 0.5 per cent stamp duty means a saving over the 1.5 per cent allowed for.

Witan's Jump Fund is relatively new although the underlying investment trust was launched in 1909, became multi-manager in 2005, and has a good global balance. It should definitely be one to watch.

The Children's Mutual has an appealing range through its Baby Bond Choice. Consider particularly Gartmore (for the US Growth), Invesco Perpetual (like the Income Fund) and UBS.

Leeds-based stockbrokers Redmayne-Bentley offer exchange traded funds and other investments, whilst most equities could be bought from Pilling, Selftrade and The Share Centre and placed in Fund accounts. If you feel domestic property is the place for 18 years of growth, look at Druids Sheffield.

The Fund may not continue in its present form under the Conservatives.

By limiting it to families earning up to 16,000, the UK would save 300m a year according to their figures.

A likely scenario is that those already in the scheme will be able to complete their plans.

Looking to future with stakeholder account

Sophie Myers chose Harrogate-based Engage Mutual Assurance, formerly known as Homeowners, as the Child Trust Fund provider for her two children – Sam, six, and four-year-old Kate, pictured.

She had heard about Engage Mutual Assurance through a friend and was looking for the right place to start savings, initially for Sam.

She chose the stakeholder account where the money goes into an investment growth fund until the 13th birthday and then gradually moves into low to medium risk areas until maturity at age 18.

Sophie, a part-time teaching assistant, who lives at Pool in Wharfedale, near Otley, said: "I am happy investing the money in the stock market as we are going for the long term and hopefully the markets will pick up."

Married to Ian, a joiner, the couple have stocks and shares of their own. They contribute 25 monthly into each child's Trust Fund account. The annual management charge is 1.5 per cent.

n Contact: Engage Mutual Assurance 0800 0286244.