Child trust fund rates drop despite savings war

Rates on cash child trust fund (CTF) accounts have fallen, despite the credit crunch stoking a war in the cash savings market.

The average maximum rates on cash CTFs have dropped 0.21 percent in the past year, according to research by price comparison website MoneyExpert.com.

The best accounts are currently paying 6.29 percent, down from 6.5 percent in June last year.

At the same time, the gap between the most and least competitive rates has widened from 2.05 percent to 3.25 percent.

The best rate at present, of 7.75 percent, is with Hanley Economic Building Society; Abbey is the worst provider, with a basic rate of just 4.5 percent.

The falling rates of interest buck the current trend for banks and building societies to boost their competitiveness to attract cash savings.

Savers are one of the few beneficiaries of the credit crunch, with increasingly attractive rates being offered as banks and building societies find it harder to raise funds on money markets.

Fixed-rate investments are particularly competitive, as they give institutions a guarantee that they will have the funds for a set period of time, which they can then use for lending on mortgages or personal loans.

As the fallout from the credit crunch continues, experts say rates could have even further to climb.

Sean Gardner, director of MoneyExpert.com, said: "For savers the only way is up in the credit crunch - unless you're a parent with a cash CTF.

"The fact that average rates on cash CTFs has fallen in the past year is really disappointing as these accounts are genuinely long-term with children unable to access the cash until they are 18. Firms could afford to offer better deals."

Up to 1,200 pounds can be saved in a cash CTF per year, to top up the initial 250 pounds given by the government to each child born on or after 1 September 2002.

Other than cash-based accounts, parents can opt to place CTF vouchers in riskier stock and shares-based accounts, or stakeholder accounts that hold a spread of investments.

As savings rates rise, inflation hits record levels and stock markets remain volatile, consumers have been retreating to the "safety" of cash.

Building societies attracted savings inflows of 853 million pounds in May - the highest figure since 2002 - the Building Societies Association (BSA) said earlier this week.

Director-general Adrian Coles said: "Yet again, savers have responded to the uncertain economic outlook by choosing the safety of a building society over the volatility of the stock market.

"High interest rates offered by societies, coupled with attractive product ranges, have seen customers continuing to flock to societies with their savings."