Children born on or after 1 September 2002 could receive over £30,000 to use as they wish when they turn 18, if maximum contributions are made into their child trust fund. All income and gains in such funds — which should be available from April 2005 — will be exempt from tax, although contributions will not be tax-deductible.

The government will make an initial endowment of £250 to each child's fund. Access will be through the child benefit system, with no need to make a claim or complete any complicated forms. Children in families that have household income below the child tax credit threshold - currently £13,230 — will receive an additional £250. Children born between 1 September 2002 and the date that the funds become available will receive a voucher for the basic payment together with an amount to compensate for the delay in investing the money.

A further payment will be made into every child's fund on their seventh birthday, again with an addition for low-income families. The amounts of these payments have yet to be decided.

The government's contributions on their own are very unlikely to grow into a large sum, no matter how well they are invested. Nevertheless, parents and others will be able to add up to a further £1,200 a year to the fund. When the fund matures on the child's 18th birthday, the child will have free access to the funds to spend or reinvest in another savings vehicle. The sum could help pay for university, travel, goods or a deposit on a first home, for example.

Providers of investment vehicles for the child trust fund will have to offer a stakeholder account — a low-cost fund with a mix of equities and bonds — and they will also be able to offer cash deposits, unit trusts and life products. Parents will retain control of the management of the fund until it matures.

Contributing to a child trust fund will not give as great a tax benefit as investing in a personal pension for a child because pension contributions are boosted by tax relief and the maximum contribution of £2,808 net of tax is much higher. However, the fund will be freely available when the child reaches the age of 18, whereas a pension fund will be tied up until the child reaches retirement age. Whether the early access is an advantage is a matter for debate, and, of course, parents could set up both tax-free funds side by side.

When the funds become available, we will be able to advise further. Meanwhile, more information can be obtained from the Inland Revenue website at www.inlandrevenue.gov.uk/ctf/factsheet.pdf