Friday, 30 March 2007

UK Stakeholder Child Trust Funds

Every child living in the UK (with some exclusions) has the right to a Child Trust Fund (CTF) and the Stakeholder is the standard type of CTF that every financial services provider must offer to the public if it wants to offer any CTF. The list of approved providers has no less than 44 companies. The providers includes a wide range of institutions from banks to building societies to credit unions to stockbrokers to fund companies. In addition, there is a list of 73 distributors who work with providers and pass along applicants, no doubt garnering a share of the fees in the process. That list is even more varied from banks again to retailers like Boots and Asda.

One might think that there would be a bewildering variety of Stakeholder plans with so many options, tweaks and special conditions that it would be impossible to compare. Not so! In fact, as it turns out, for a Stakeholder type of account, there is little need to compare. One is pretty safe to simply go to whatever institution or store one finds most convenient. That's due to several reasons:
  • first, the government has imposed certain terms and conditions that every Stakeholder plan must respect, like a cap on annual fees of 1.5%, no upfront charges or commissions, no charges/commissions on additional investments, no exit fees, no switching fees, acceptance of additional lump-sum or monthly investments as low as £10; this eliminates almost all of the nit-picky but often important detail differences between providers and their products that drives one crazy trying to compare - hooray!
  • second, it seems that the majority of providers have opted to offer (only) a UK FTSE index tracking fund for their Stakeholder accounts; some use Legal and General's FTSE All-Share Tracker, some the Insight Investment or the Homeowners versions thereof while F&C use their own; the providers that differ provide a balanced fund of about half equities vs fixed income/gilts; though I prefer the all equities option due to the 18-year long investment time horizon (the child only receives the funds at their 18th birthday, so there is time to even out the highs and lows of stock markets and gain the historically greater returns of stocks over fixed income), either type of plan is ok; the nature of the underlying investment, whether equity index tracker or balanced fund is probably the only question that needs to be asked I believe.
  • third, the cap on fees at 1.5% means that all the providers, are you ready, have exactly 1.5% annual fee - no shopping around required! While this may seem like cartel pricing, if one puts oneself in the shoes of the financial provider, there will likely be a lot of small accounts (the government contributes only £250 at birth and another £250 at age 7) and a lot of ordinary folk who need much handholding at extra cost, so there likely isn't a huge profit being made. I'm guessing this is also the reason those cheaper-to-administer index tracking funds are the standard investment vehicle ... but that's a good thing compared to actively-managed funds, which as we all know will, on average, under-perform the index. The only exception I found to the 1.5% annual fee, out of about ten funds I checked into, was the F&C offering of their own FTSE All-Share Tracker at 1.22% annually - go for it!
So there you are, stick your child's money and anything else you can spare - best, just set up an automatic debit from an account into the CTF (another capability that is mandatory for all Stakeholder accounts) - then forget about it for 18 years while you get on with life.

Actually, that's not quite the best approach. When the account balance gets to about £1100, it is worth looking to switch to a non-Stakeholder Share dealing account. These types of accounts allow any sorts of fees, conditions and investments, which one chooses oneself, so a lot of shopping around and nit-picky comparison is required. Though I did not check out all the 13 approved providers (listed here) of this type of account, an interesting one I came across is offered by The Share Centre, which allows one to buy the Legal & General UK Index Tracker at no upfront charge at a mere £10 or more per contribution and the annual fee amounts to about 1.03% (0.125% quarterly admin fee plus 0.53% Legal and General annual management fee). That's an assured risk-free increase in annual return of almost half a percent - £4.70 per year per £1000. It more or less pays for the Share Centre admin fee.

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