FOOL'S EYE VIEW
Children Get A Financial Boost

By Jane Mack (TMFJane)
October 28, 2003

Well, it's been a long time coming but the Government has finally revealed the details of how the new Child Trust Fund will work. It's been two and half years since the Chancellor announced his plans to give children a financial start in life and it's only now that the scheme can finally be implemented. 

Every baby born after August 31st 2002 will get a gift from the Government of £250, rising to £500 for low-income families who qualify for the full Child Tax Credit. An additional lump sum will be added to the fund when the child reaches the age of seven although the amount has yet to be decided.

In addition, family and friends will be allowed to top up the fund between them by up to £1,200 a year and it can be invested in shares, bonds or cash. No access to the funds will be permitted until the child reaches 18 so once the contributions have been made, they're locked in for the lifetime of the fund. Like the ISA, growth in the fund will be exempt from tax.

So how much will this Child Trust Fund produce over 18 years? Well, unless family and friends contribute, not a lot. Assuming the initial £250 is invested in equities and that the fund grows by 7% in real terms, it'll increase to £845 after 18 years. And assuming the Government adds another £250 at age seven, the child could get £1,371.

Children of low-income families who get the full £500 at the start will fare rather better. They can expect £1,690 at 18 from the initial £500 and if an extra £250 is added at age seven it should produce in total £2,216.

As the Tories were quick to point out, it's barely enough to pay for the first year's tuition fees at university.

The key to getting the best out of the scheme will be investment by family and friends. If they drip-feed £100 a month into the fund, and assuming growth at 7% and that £250 is added by the Government at age seven, the child could walk away with £43,701. Those from low-income families could get an even better £44,546.

It's not actually as good a deal as the Chancellor first proposed. Back in March 2001, the plans were vague but we were led to believe that each newborn would get an endowment of probably £500 at birth followed by further top-ups at ages 5, 11 and 16. However, I suppose parents ought to be grateful that they and other relatives and friends will be allowed to contribute £1,200 a year instead of the £1,000 that was first mooted.

Parents won't have to apply for the scheme - as long as they're claiming Child Benefit they'll get the endowment automatically in the form of a voucher. If they don't invest it within a year of receiving it, the Inland Revenue will do it automatically.

The Government has also decided that the tax rules that usually apply to gifts made by parents to their children should not apply on contributions to the fund. Normally, where a gift from a parent gives rise to income of more than £100 in a year, the parent is taxed on it. Contributions to a Child Trust Fund account won't count towards this limit.

Unfortunately, the vouchers won't be sent out until 2005 thus ensuring that children will miss out on any potential growth on their money for two more years.

Find out more about the Child Trust Fund and Investing For Children