1.5% annual fee for child trust funds

The government disappointed some this week by announcing that providers of its new child trust funds will be able to charge up to 1.5% a year for managing people's money.

Due to become available in April 2005, the long-awaited child trust funds will benefit every baby born after September 1, 2002, by giving them a government cash handout at birth. This will be £250 for most children but £500 for youngsters from the poorest third of families.

A further as yet undecided government payment will be made on the child's seventh birthday, and parents and others can between them put in up to £1,200 a year. The aim is to help build up a pot of money available at age 18 which could be used to help fund university costs or put towards a deposit on a home. However, some commentators say children from better-off families are likely to benefit most from the programme.

The government originally favoured a maximum 1% annual charge for running the funds but after some heavy industry lobbying has opted to set the charge cap at 1.5%. Virgin Money says this decision had a lot to do with "appeasing the insurers who have stubbornly refused to entertain child trust funds in the '1% world".

Howeowners Friendly Society is among the firms that says it is fully committed to being a provider of the funds when they launch. It says £250 invested over 18 years in a fund with a 1.5% annual management charge could deliver a return of £645, assuming annual investment growth of 7% a year.

If it's topped up with a monthly contribution of £10, this increases to approximately £4,250. Even better, it says, if you can afford to pay half the child benefit each month (£34.73 for the eldest child), the fund could return approximately £13,165.