The UK government gives all newborn babies a minimum £250 in a Child Trust Fund, hoping this will encourage saving. MoneyExpert.com looks at how the scheme works.

Think of "trust funds" and most of us picture a wealthy young American who spends summer in the Hamptons and winter skiing in Aspen.

However, the Ivanka Trump's and Paris Hilton's of this world aren't the only ones sitting on a nest egg these days. The growth of the Child Trust Fund (CTF) initiative and the competitive children's savings account market means there are thousands of children sitting on a tidy sum - and with interest rates above 5 per cent there's never been a better time to start putting away some cash for the kids.

A helping hand
The introduction of CTFs by the Government in 2002 has meant that all children born today are given £250 to open a special type of savings account which can then be accessed when they turn eighteen. You can pay up to £1,200 into these accounts each year tax-free.

If you're a new parent and considering how to use your child's CTF, make sure you choose a provider you're happy with as there are number of ways in which the money can be invested.

The simplest method is a straightforward savings account which will guarantee any investment made and provide interest on the account. CTF money can also be entered in so-called "stakeholder accounts", which invest in company shares. These accounts expose your money to the stock market which carries an element of risk but the potential returns are significant.

Trust your instincts
There are some excellent deals on CTFs so over 18 years there's nothing to stop your child from walking away with a hefty nest egg when the trust matures. Skipton Building Society for example offers 7.25 per cent interest and Britannia Building Society's account offers 6.25 per cent.

If you were to pay in £250 each year for eighteen years and you earned 6.25 per cent interest each year then your child would be left with a pot worth £8,656 at the end.

Stakeholder accounts can't guarantee a certain return in this way as performance is linked to the stock market. If you decide that a stakeholder is the right option for you then look for accounts with a low management costs and any added incentives. The typical annual management fee is around 1.5 per cent although some providers will do the job for a 1 per cent cut.

Set the kids up via the high street
Children's savings accounts are a popular alternative and addition to CTFs. Amongst the 30 market-leading accounts the average rate of interest paid out is 6.25 per cent and if you choose carefully you could find yourself with an even better rate. The Nottingham Building Society offers 7.5 per cent AER with a minimum investment of just £10, while Halifax's Children's Regular Saver pays out a massive 10 per cent AER. It limits you to a maximum monthly contribution of £100 however.

Unlike CTFs these accounts will give your children easy access to their money, and while you may not want them to be frittering cash away this could come in handy should there be an important purchase they wish to make.

It's child's play...
The Government coughing up £250 cash per child is a real opportunity so be sure to make the most of your CTF. Take the time to choose an account which you feel happy with and if you have some disposable income be sure to top the CTF up with regular direct debits. Adding just £250 a year over eighteen years can create quite a stash.

With rates as high as 10 per cent it's worth well considering establishing a savings account in addition to a CTF. Your children will have some money which they can access when they need it and if you manage to get them into the habit of saving early then you'll be teaching them an important financial lesson.

The article Saving for the future originally appeared on 999 Today