This Is Money
By: Alan O'Sullivan
May 24, 2010
Child Trust Funds have been axed for all children by the Government as part of its attempt to tackle the nation's £156bn deficit in public finances.
The move has come a surprise as many believed the system would partially survive, but only for lower income families.
Payments will be phased out from August and end altogether from 1 January 2010.
The Conservatives had promised to only partially cut back on CTFs in their election manifesto, by restricting payouts to those families on incomes of less than £16,000 a year - the poorest one-third of families. The Lib Dems said they would axe them completely.
Child Trust Funds (CTFs) were launched with much fanfare by Labour for children born from 2002 September.
But the scheme failed to be as successful as first hoped in encouraging parents to save: a quarter of new parents failed to open an account for their child in the first four years of the scheme, although 5m families have opened them in the past eight years.
Under the scheme, every newborn child is entitled to a £250 savings voucher with the promise of another payout at age seven, which can be placed in cash or shares.
Children from poorer families receive double, £500, children with a disability receive extra payments and parents can make additional tax-free contributions of up to £1,200 a year. The government invests the vouchers with randomly selected CTF providers for babies when parents fail to open an account.
The Conservatives had said they would only partially cut back on CTFs. However, the Liberal Democrats proposed scrapping them altogether and have finally had their way, despite a last ditch attempt by City fund managers and campaign groups to retain the scheme. The abolition of CTFs will save £520m from public spending.
Top-ups will be scrapped from August. Payouts to newborns will be reduced from £250 to £50 for better-off families and £500 to £100 for lower-income families from August. Finally, all payments will cease from 1 January.
Although the Treasury states CTF providers will continue to manage schemes on behalf of existing savers, there are fears some may not be able to continue, forcing parents to move their child's nest-egg elsewhere.
We also awaiting clarification on whether the major CTF providers will be able to continue running their schemes following the Government's announcement.
The earliest CTFs are due to mature when the first children to receive them turn 18 in 2020.
David Laws, chief secretary to the Treasury, said it was a 'deception' to suggest young people were being made richer by the scheme. 'I know that this will be a disappointment to some parents, but we need to be honest about what we are doing,' he said. 'At present, the Child Trust Fund is based on the claim that young people will build up an asset which they can use later in life.
'But since government payments into the scheme are essentially being funded by public borrowing, the government is also storing up debts which will have to be repaid by the same young people.'
How CTFs will be phased out
- Newborn children born after August 1 will receive £50 instead of £250. Children in lower income homes will get £100 - down from £500 previously;
- There will no longer be an additional payment when children reach the age of seven, from 1 August, and all payments will be stopped from the start of next year once the law is changed.
This is Money says:
The aim of CTFs was to instill the savings habit in families from an early age. Maybe they weren't as great a success as the investment industry first hoped, but millions of families currently benefit from the payouts and millions more would have as well.
There were concerns middle-class families were benefiting from them more than their intended target - families on low incomes - but this does not justify scrapping them completely.
Even if parents didn't bother making any additional payments and the Government's two contributions of £500 were left to grow for a child from a disadvantaged background, this would have netted the child a pot of £2,453 at the age of 18 (on investment returns of 6% after charges). A fortune to a child struggling to get some form of higher education.
Although our new Government's tough stance on public spending is to be lauded, robbing a child-like Peter to pay Paul is not the answer.