CTF discussion area

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This discussion relates to the updated Child Trust Funds article. Click reply to discuss.
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  • Thanks for the article Martin,

    Although I am keen on a stakeholder the wife does not want to 'gamble' with my daughters money, and would rather a savings account.

    I am quite interested to hear what others reccomend about savings that I already have. Currently am putting away £10 a month (not alot but it all helps) in to the A+L First account. Is it worth putting this £150 into the CTF account, or keep it seperate.
    I can see the danger of letting an 18yr old daughter have the money to do as she pleases, so it might just be worthwhile saving some where I can have more of a say about how it is used!

    Thanks

    G1W
    LBM 12.09.12 - £53K in debt.
    DFD - 11.07.2019 (OMG).
    New DFD is 28.10.2018 due to paying the absolute maximum.

    Thanks to everyone on the DMP forum, and to SC for helping me out of this huge hole.
  • dunstonh
    dunstonh Posts: 116,044
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    Investment risk is also a time issue. Investing in the UK stockmarket, for example, for 1 year is considerably riskier than investing for 18 years.

    In addition, it could end up being riskier putting the money on deposit than other investments which have higher potential. For instance if interest rates drop below the level of inflation.

    If you dont like stockmarket investments, then there are corporate bonds, gilts and commercial property to consider which are lower risk than the stockmarket.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • dunstonh wrote:
    In addition, it could end up being riskier putting the money on deposit than other investments which have higher potential.

    It could, but then again, the cash CTFs levy no charges, whereas the equity ones do -- and will do even after conversion essentially into cash during the final five years. So equity CTFs are certain to underperform during the last five years, meaning they have to outperform by a lot more than that in the first 10 or 12.

    I worked out last week that equity CTFs need to do about 2.5% better than cash over those years.

    That means a 7.5% return just to break even with cash.

    It's possible, I s'pose, but good luck picking one of the ones that will manage it.
  • dunstonh
    dunstonh Posts: 116,044
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    It could, but then again, the cash CTFs levy no charges, whereas the equity ones do -- and will do even after conversion essentially into cash during the final five years. So equity CTFs are certain to underperform during the last five years, meaning they have to outperform by a lot more than that in the first 10 or 12.

    I worked out last week that equity CTFs need to do about 2.5% better than cash over those years.

    That means a 7.5% return just to break even with cash.

    It's possible, I s'pose, but good luck picking one of the ones that will manage it.

    You are talking about a reduction in yield due to charges of around 1%. That isnt exactly a worry and I'm not sure where you get these exit charges from. There is certainly no reason to say that the last 5 years on an equity CTF would perform worse than a cash based one. If market performance was a concern, then you would just reduce the equity holdings into cash or fixed interest based funds between 3-5 years before maturity.

    Interest rates are not always going to be at this level. If inflation was to rear its ugly head again, then the stockmarkets tend to do quite well during that time. So you may get around 5% now but it could be 3% in 4 years time. If inflation is at 2.5% then you are only making a real return of 0.5%.

    So a stockmarket fund averaging 7% p.a. (which is well below the last 24 months figures) with a deduction of 1% for annual charges is still 6%. If you then take off 2.5% for inflation then you get a real return of 3.5%. Yes, there will be ups and downs but over 18 years the impact of these is less than over a few years. Even with the recent stockmarket crash, the UK all companies sector (the average) would have doubled the money in 10 years. That would not have been achieved on a deposit style account.

    If the stockmarkets are out of the question, then commercial property funds would be extremely desirable and lower risk than the stockmarket (i.e. the money in the fund buys properties and these are rented out to retailers, Govt etc. The rental income minus admin charges is the return).

    You have to be happy with what you are doing but don't let short term drops in the market influence what is in effect a long term decision.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • got an info pack from nationwide
    they offer 5% on their savings ctf but will bump it up to 6%
    if an extra £120 is saved each 12 months.

    I too am not a fan of the fund being handed over to the child at 18 as i clearly remember how i was at that age :D

    if i had only a tenner a month spare to add to the ctf i think I would go with the nationwide for the rate but if i was putting in a bigger chunk i would probably have a parallel investment with this cash that I would have control over.
  • MSE_Martin
    MSE_Martin Posts: 8,272
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    While I agree in the generality I'm afraid i can't agree with the phrase

    "it could be riskier to keep the money on deposit"

    It will never be riskier to keep the money on deposit. Over the long run keeping the money on deposit may underperform the stockmarket/investment options, but that doesn't make it riskier.

    It goes back to the base point

    Risk means higher possible gain, higher possible loss.

    Looking back in hindsight - the investment that performed best doesn't make it the least risky, it could equally have performed badly.

    I hope this makes sense.

    For me it is a crucial point people need to understand about investment - risk is judged by the degree of surety, not by the defree of performance.

    Martin :)
    Martin Lewis, Money Saving Expert.
    Please note, answers don't constitute financial advice, it is based on generalised journalistic research. Always ensure any decision is made with regards to your own individual circumstance.
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  • dunstonh
    dunstonh Posts: 116,044
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    It will never be riskier to keep the money on deposit. Over the long run keeping the money on deposit may underperform the stockmarket/investment options, but that doesn't make it riskier.

    That is at odds with the general stance that there is a risk to deposits not keeping up with inflation. Anyone getting a return less than inflation is in effect losing money.

    At the moment, you can quite easily get an interest rate nicely in excess of inflation but that hasnt always been the case and will not always be the case. Plus, you have loads of people who are not on these higher rate accounts and stuck on old style 1% accounts who are in effect losing money.

    Inflation is a risk factor that does need to be considered when looking at 18 years. It's a diffferent type of risk factor and I wouldn't say (and didn't say) that it was riskier than stockmarket. You could look at index linked gilts as a good way to beat inflation and get a real return. Yes there is a risk the Govt go bankrupt but is that risk any more than the risk of inflation when looking at an 18 year term?

    We are talking about £250 here and an 18 year term. At 4% per annum average, you are looking to get £506.45 back at year 18. Assuming a 3% average inflation rate (which is much lower than achieved historically) you are looking at that £506.45 having the spending power of £299 today. All that after 18 years.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Spendless
    Spendless Posts: 24,111
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    Can someone help me out here. My youngest qualifies and i've just read Martins article and we don't have a Skipton or Furness BS here.

    I didn't want to add to the CTF on a monthly basis(via SO or DD) cos i would prefer i had more control over any money.

    How could i add to the CTF on an occassional basis?
  • MSE_Martin
    MSE_Martin Posts: 8,272
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    Hi Dunstonh

    Sorry about this but it's a really important point that many misunderstand. I agree with your concept but not your terms.

    Performance and risk are seperate things.

    Increased risk means higher possible reward and higher possible loss
    Decreased risk means lower possible reward and lower possible loss

    Deposit accounts are not risky. As such if the market is good they will underperform, if the market is bad they will overperform. Yet this doesn't make them more 'risky' as products.
    Martin Lewis, Money Saving Expert.
    Please note, answers don't constitute financial advice, it is based on generalised journalistic research. Always ensure any decision is made with regards to your own individual circumstance.
    Don't miss out on urgent MoneySaving, get my weekly e-mail at www.moneysavingexpert.com/tips.
    Debt-Free Wannabee Official Nerd Club: (Honorary) Members number 000
  • dunstonh
    dunstonh Posts: 116,044
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    Ok, we agree concept but we are using different terminology. I checked with a research bulletin which was made available to over 5000 IFA firms and that classes the effect of inflation on long term cash deposts as "a risk to the real asset value". One is attitude to investment risk. The other is impact on real value and the risk of it going down in real terms. Same word but used in different context.

    This may be a better way of wording it (without the word risk):

    A deposit account will always show £250 plus interest paid. If the average rate of return over that 18 years is less than the average rate of inflation, you will end up with an amount higher than £250 but with less spending power than £250 has today.


    This may seem unlikely considering what has happened with interest rates and inflation in recent years. However, this is an 18 year product. All sorts of things can happen and will happen. Most of which no-one can predict.

    If you had £2,000 in 1970, it would have needed to grow to £13,000 in 1990 just to have the same real value. That may seem like a long time ago but had you taken one of these CTFs in 1990, it would still not have matured now. During that time we have had house prices boom, crash and boom. A couple of wars, stockmarket boom and crash and currency fluctuations and changes with the Euro, which are still ongoing. Interest rates skyrocketed at one point and then down to the lowest levels in recent history.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
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