We have known for some time that it was Conservative party policy to scrap Child Trust Fund (CTF) payments for all but the poorest families. It therefore came as a bit of a shock to hear George Osborne announcing that CTF payments are being scrapped entirely.
Within the range of cost cutting measures announced as a first step to tackle the massive budget deficit, CTF payments will stop from January 2011.
The £250 vouchers will be scaled back to £50 from the 1st of August this year. Lower income families and parents of disabled children will receive £100 instead of £500. Children will also no longer receive top-up payments at age 7 from 1st August.
This move will save the government some money. Over the next tax year they forecast a saving of £320m, with £20m of this saving being spent on extra “respite breaks” for disabled children.
Child Trust Funds were an admirable savings initiative, but in practice they largely failed to achieve their objectives.
The £250 or £500 voucher plus a top-up payment when the child was older was always unlikely to result in a meaningful nest egg on an 18th birthday. They did serve a purpose when parents or grandparents could afford to save up to the £1,200 a year limit, even when only modest additional savings were made.
What the Child Trust Fund did create was difficult decisions about whether to choose a Stakeholder or non-Stakeholder product, and then whether to allocate the money to cash or equity investments.
Due to the level of money involved, it was always going to be difficult to justify the cost of independent financial advice when making these decisions, unless part of a more comprehensive investment or financial planning activity.
There are no plans at the moment to stop future personal contributions to existing CTF accounts. What we hope to see introduced is a form of Children’s ISA, enabling parents of newborns to save for all of the children in their family in a tax-efficient environment.
Child Trust Fund or not, parents will continue to save for their children.
There is widespread recognition that getting started in adult life is becoming increasingly expensive. Getting through University without being heavily laden with debts often means parental support. Stepping onto the housing ladder at an early stage in your career continues to require a hefty deposit.
This might be the end of Child Trust Fund payments but it does not signal the end of saving and planning for the future.
