‘How do I invest my child’s £56k trust fund?’

With inflation on the rise, it is more important than ever to protect our carefully nurtured nest eggs. By Harry Brennan

In 2005, former chancellor Gordon Brown launched a tax-free savings scheme designed to help parents save for their children’s futures. Some six million children born between 2002 and 2011 were handed savings vouchers worth £ 250, or £500 for those from low-income families. The money could be left in cash or invested. The family could make additional contributions to the pot, which the child could access when they turned 18.

Catherine Alderson, 60, from Tyne and Wear, has managed to turn her daughter’s £ 250 trust fund into a £56,000 nest egg. Now her daughter is of age to manage the funds herself, Ms Alderson wants help in advising her how she might use the funds and keep them safe.

“My daughter was born in February of 2004 and we took advantage of the government voucher, opening an account and then adding to it over the years with the help of grandparents. It has been invested in the HSBC UK Growth and Income fund, but I want to know the best place to put it to combat the impact of inflation,” she said.

“At present, my daughter is studying for A-levels and is looking to go to university to study costume design. I am wondering if she should use the money to pay for her tuition or save it to buy a house when she is ready.”

Ms Alderson said she was unsure whether she should leave the money in the Child Trust Fund, move it into an Isa or transfer it to a Lifetime Isa, a state-aided savings scheme me aimed at helping first-time buyers s on to the property ladder.

Faye Silver

Wealth manager at Raymond d James, an investment bank Ms Alderson’s daughter should ould not use the £56,000 savings pot to fund her university tuition, , but keep the funds invested and take out student loans instead. ad.

Rather than considering ng the loans a debt, they can be viewed more like a tax, which ch is paid only once earnings ngs exceed £27,295 a year at a rate ate of 9pc of earnings.

This means that low earnrners pay little or nothing, and nd the debt is erased after 30 years, meaning her daugh- gh

Catherine Alderson has saved up for her daughter, who wants to study costume design ter may in fact never have to pay back a penny, depending on how much she earns over her career. By keeping hold of the savings pot for now, Ms Alderson’s daughter will leave university with a lump sum to purchase a property early on in her career, rather than paying rent for years.

She should move the money from the Child Trust Fund to a stocks-and-shares Isa, a tax- free savings wrapper. The entire £56,000 pot can be transferred without affecting the £20,000 annual limit for Isa contributions. She can then continue to save into this account in the future.

To get on the property ladder even sooner, Ms Alderson’s daughter should consider putting some of the money into a Lifetime Isa. The limit here is £4,000 per tax year, on which she would receive a £1,000 bonus from the Government – an impressive return in today’s low-interest and high-inflation environment.

The money must be used to fund a deposit on a first home valued at no more than £450,000, or else it cannot be accessed until the age of 60. She should note that failure to meet these requirements triggers a 25pc penalty, which can leave you with less money than you put in originally.

As buying a home is likely to be some way off for Ms Alderson’s daughter, who is only 18, I recommend investing in both Isa pots rather than keeping the money in cash. This will avoid the buying power of the savings depleting over time. This is especially important now, with inflation currently coming in at more than 5pc – the highest for 30 years. y

We wou would consider using a multiasset fun fund such as Trojan Ethical, which aims aim to deliver returns regardless of market ma conditions and has an ethical i investment outlook, which is an increasingly inc important requirement men for younger investors.

Other O funds we like with an eth ethical edge include Gravis Cl Clean Energy, which will pr provide exposure to British ma markets; Man GLG Continental European Growth, for an allocation all to European stocks; Montanaro Better World Fund, which will tap into global g markets; and Stewart I Investors Asia Pacific Lead

ers and Stewart Investors

Global Emerging Markets Sustainability, to tap into the growth potential of Asian and emerging market economies.

Hayley North Chartered financial planner at Rose & North, an advice firm

The HSBC UK Growth and Income fund Ms Alderson has used to invest her daughter’s savings so far has significantly failed to hit its performance benchmark over the longer term (beating it in only two of the past 10 years).

While this is much better than cash returns over this period, the money could be much better invested. We suggest choosing 15 to 20 actively managed funds, which will spread the risk across different fund managers, geographies and types of investment.

Even if Ms Alderson’s daughter took out, say, £10,000 to fund a gap year or her lifestyle at university over the next few years and invested the remainder for another 10, she should be able to turn £46,000 into £75,838 (not taking inflation into account) by age 28, which is half the cost of a small starter home in the area in which she lives. If she were able to contribute another £100 each month, she could have £91,440. Regular saving makes a huge difference.

This is based on a cautious annual return of 5pc, net of fees.

The most important mistake to avoid when a Child Trust Fund matures is withdrawing the funds to reinvest. This money must instead be transferred into an Isa tax wrapper in order to retain its tax-free status.

Child Trust Funds were replaced by Junior Isas in 2011 and it is now possible to transfer a Child Trust Fund to a Junior Isa or, if matured, to a standard Isa, which typically offer greater flexibility and lower charges.

Ms Alderson’s daughter can contribute up to £20,000 a year to an Isa. The annual allowance for a Child Trust Fund or Junior Isa is £9,000.

While Lifetime Isas are also an option, Ms Alderson’s daughter will be better served using a standard investment Isa for now, as this will enable her to make her own choices about how and when to spend her money in the future.