Child Trust Funds
Dan Welch investigates the ethical options for investing in children’s futures
At the last count there were 71 Child Trust Funds (CTFs) providers in the UK, from credit unions and friendly societies to Tesco Finance and Royal Bank of Scotland. Many of the providers have previously been reviewed in either our report on ethical investment funds (EC111) or our recent reports on banks and building societies in EC118. For the table of this report we’ve selected the five CTF’s listed as ‘Ethical’ on the official UK list of providers, previous Ethical Consumer Best Buys for other financial products, and those currently rated best buy for financial performance by Which? (all of which happen to be building societies).
Since the Child Trust Fund (CTF) scheme was launched by the Government in 2005 £2 billion has been invested in CTFs for 4.6 million children. Around a quarter of accounts are topped up after the initial government grant, by parents, grandparents, family and friends – on average by £289 in the last year. Few parents would want the money invested for their children’s futures to be invested in companies that were busy undermining the social and environment sustainability on which that future depends.
If you’re contributing to a family member or friend’s CTF it might be a good opportunity to introduce the parents to the idea of ethical investment. The initial choice, after all, is likely to have been made when changing nappies and grabbing some sleep were rather more pressing than reading up on ethical investment criteria.
Child Trust Funds - the Facts
Children born since 1 September 2002 are eligible to a £250 CTF voucher (£500 where household income is less than £16,040 for 2009/10). If parents don’t open an account one year after issue of the voucher the Inland Revenue automatically opens a ‘stakeholder account’ for the child. You can change provider or account at any time. A further voucher for £250 (or £500) is issued on the child’s seventh birthday. Accounts can be topped up by friends and family to a maximum of £1,200 a year. Once paid in, however, funds can’t be withdrawn – they are paid out to the child on their 18th birthday.
CTFs have the same tax rules as ISAs. Cash accounts are tax-free, funds in the share-based accounts (including stakeholders) are liable for income tax at 10% on any dividends received. There is no liability to capital gains tax, and CTFs are exempt from the ‘£100 rule’ applied to most other types of children’s savings and investments, where interest is taxed.
‘Distributors’ work with providers to provide access to CTF services. They include banks and building societies, the Post Office and even ASDA and Boots.
There are three types of CTF:
• Cash – Essentially a tax free saving account (although you can’t make withdrawals). Many building societies and credit unions offer cash CTFs. They avoid ethical dilemmas about what the CTF is invested in, leaving the ethics of the provider the only issue.
• Stakeholder - All CTF providers are required by law to provide stakeholder trusts, which must invest in stocks and shares. Many do this through a third-party provider, in which case you may want to consider the ethics of the provider of the stakeholder fund. For example, a stakeholder CTF taken out with Earl Shilton BS is actually invested in one of Legal & General’s funds (ethiscore 4). We flag up who provides which stakeholder CTFs in Company Profiles. Stakeholder CTFs have to meet certain conditions regarding the type and spread of investments allowed, in order to moderate the fund’s exposure to risk. Like any sensible investment plan it is ‘lifestyled’ – in year 13 it’s gradually transferred to less risky investments like bonds or cash. It is intended to take advantage of the presumed higher yields of shares whilst reducing exposure to the volatility of the stock market as the fund nears maturity. Most stakeholder CTFs charge the maximum annual management charge allowed, of 1.5%.
• Shares – These accounts offer the usual potential rewards, and risks, of investing in the stock market. Share CTFs offer investment in one or more investment funds. Where several funds are on offer you can switch from one to another, and often can invest in more than one (although you may be charged for this). With share CTFs, your primary ethical concern is likely to be the companies that the fund actually invest in. ‘Fund fact sheets’ list top ten holdings – they’re not comfortable reading for an ethical investor. You can find most fund factsheets on www.trustnet.com – alternatively ask the provider for one.
‘Self select’ share CTFs allow you to select almost any fund you like and buy shares directly too, all within the CTF wrapper, making ethical options possible. Independent financial advisors strongly advise against direct share ownership to all but wealthy individuals because of the potential risks.
Selftrade (0845 0700720), part of the Société Générale Group, offers an online self select option. Reyker Securities’ (020 7499 9097) 4thekids CTF is also self select.
The Conservative party recently announced plans to abolish new CTFs (and top ups at 7) for families earning over £16,000 a year. The tax status of existing CTFs under a Tory government remains unclear.
Thirty one credit unions offer CTFs, both cash and stakeholder. Credit unions are not-for-profit financial co-operatives, owned and run by their members, with the main purpose of providing affordable loans to their members. Money held in credit unions is guaranteed by the FSA, just as if it were in a bank.
Eligibility for membership may be determined by where you live, your employer, or belonging to a church or union. Some areas of the country, including Bristol, Glasgow, Hull, Leicester, Hampshire and much of Wales, are served better than others (see Links).
A ‘generic’ credit union could score 15 on our table. Credit unions do bank their money – usually with the Co-operative or Unity Bank (a specialist bank for the third sector) – so check where your money will be kept before signing up. In addition, check which stakeholder CTF provider the credit union uses (see below for how we’ve scored the relation to stakeholder providers on the table).
How we’ve rated the providers
We rate financial institutions not only on their own actions, but on their investment relationships. Where an institution has an investment relationship with a company that has a worst rating in any of our categories, the investing institution receives a middle rating in that category. For example, Foresters Friendly Society (FFS) invests in one of Legal & General’s funds. So because Legal & General has bottom rating for Anti-Social Finance, we have given FFS a middle rating in that category. An exception to this rule is where a financial institution has demonstrated best practice in engagement on an issue. So, although the investment arm of the F&C has investments in Shell it does not receive a Climate Change mark, because it engages actively on carbon disclosure and other climate change issues.
For this report, the organisations on the table have been rated as having an ‘investment relationship’ with the provider of their stakeholder CTF. In reality this relationship may be arms length. Methodist, for example, state they do not benefit financially from HSBC, who provide their stakeholder CTF.(5) This has been done to provide differentiation, as organisations can choose more or less ethical providers for this service. We have not however rated the provision of financial services other than stakeholder CTFs in this way within this report.
CTFs with ethical criteria get a Product Sustainability mark. Co-ops and not-for-profits get a full Company Ethos mark, mutuals a half mark.
The five smaller building societies on the table all offer cash CTFs that can be managed by branch or post, Yorskshire and Earl Shilton also by phone. Their stakeholder CTFs are provided as follows: Yorkshire by engage Mutual Assurance; Chorley by Scottish Friendly Assurance; Earl Shilton by Legal & General; Skipton by Family Investments. Anti-Social Finance marks in this group are for provision of ‘off shore’ accounts.
The FTSE4Good Index screens out companies involved in the production of tobacco, nuclear and other “whole weapons systems” and nuclear power stations, as well as meeting standards on environmental sustainability, stakeholder relations, human rights, supply chain labour standards and bribery. However, with companies such as Rio Tinto and Shell in the Index, funds investing in it may not provide tight enough ethical criteria for all readers.(2)
Ancient Order of Foresters Friendly Society (FFS) was founded in Rochdale in 1834 to provide mutual aid as members “walked through the forests of life”. FFS is unusual for a ‘friendly’ in having a network of 230 branches. It picks up negative marks because of investments with a Legal & General unit trust. FSS’ Ethical share CTF has the strictest ethical criteria of any of the ethical funds reviewed in this report. Criteria include: Animal Testing; Gambling; Health & Safety Convictions; Oppressive Regimes; Intensive Farming; Military; Nuclear Power; Pornography; Tobacco; Sustainable Timber; Water Pollution.1 Full details are available on the website.
The Tunbridge Wells Equitable Friendly Society, long a specialist in savings for children, worked with the Government on developing the CTF scheme, re-launching as The Children’s Mutual in 2003. It was awarded Best Child Trust Fund Provider of the Year for the third consecutive year in 2008 by Moneyfacts. It offers four options: stakeholder; a Shariah stakeholder fund; Baby Bond Choice – a share CTF that allows you to pick from a range of fund providers; and the stakeholder Ethical Baby Bond. This ethical option is in association with Co-operative Investments and invests in the CIS UK FTSE4Good Tracker Trust. The Co-operative Investments was a Best Buy in our 2008 Ethical Investments report (EC111), for integrating ethical criteria into its general investment process and best practice in enagagement and transparency. On the table the scores of both Children’s Mutual and Co-op are combined for this product – thus the middle rating for Environmental Reporting despite Co-op’s best rating in this category.
Family Investments with over a million accounts, is the most popular CTF provider. The Ethical Stakeholder CTF is initially invested in the mutual’s Ethical Trust, a tracker fund invested in the FTSE4Good UK 50 Total Return Index.
Methodist Chapel Aid Ltd offers a cash CTF. It does not invest in companies “substantially involved” in tobacco, gambling, alcohol, the arms trade, oppressive regimes, pornography, intensive farming, human rights abuse, non-medial animal testing or “harmful ecological impact.”(4) It picks up its negative scores from HSBC.
Britannia recently merged The Co-operative Financial Services. The Co-op Group, because it also a retailer, picks up negative scores for issues such as factory farming which do not apply to any of the other providers on the table. Our ethiscores work best when we are comparing like with like, so here the Co-op’s score may appear ‘artifically’ low.
F&C shares CTF offers a range of investment fund options, but not, unfortunately its ethical funds. F&C was awarded a Best Buy in our Ethical Investment report.
Healthy Investment’s share CTF invests in the society’s Ethical Fund, managed by Sarasin & Partners, and seeks returns from a mix of shares, bonds and commercial property. The fund “does not knowingly invest directly in alcohol, tobacco or arms companies”.(3) This rather limited screening is unlikely to satisfy many of today’s ethical investors. The Society, formerly restricted to teetotallers, now also accepts ‘moderate drinkers’.
1 www.forestersfriendlysociety.co.uk viewed 23/11/09
3 Rechabite Firendly Society Limited Report and accounts 2008
4 www.methodistchapel.co.uk viewed 23/11/09
5 telephone call with representative 25/11/09.