Should CTFs continue, even if no government money is forthcoming?
As widely expected, one of the first announcements made by the new coalition Government back in May was that the Child Trust Fund (CTF) scheme was to be phased out during 2010 and then scrapped from 1 January 2011. With children born from 1 August the first to receive the reduced £50 Government contribution, what are the benefits of the scheme, what's going to happen to them and what are the alternatives?
The current scheme
Under current rules, each child eligible for child benefit in the UK receives a Government voucher that must be invested in a CTF account. CTF accounts can be cash, stakeholder investment (equity exposure with strict charges and investment rules) or shares investment.
Anyone else, although most likely to be friends and family, can add funds to a child's account, up to a maximum of £1,200 per account per tax year. The fund grows tax free and becomes the child's cash at age 18 to do with what they will. That's right whatever an 18 year old decides to spend his or her cash on.
Under the original rules, each child was given £250 by the Government at birth and a further £250 at age 7, and these amounts were doubled for the lowest income families. Under the new rules, children born between 1 August 2010 and 31 December 2010 will receive £50 at birth only, and from 1 January 2011, no further Government payments will be paid.
As the scheme started on 1 September 2002, this means that parents of children born between 1 September 2002 and 31 July 2003 are the only ones lucky enough to have received their age 7 payments. Lucky them.
What happens in January 2011?
As described, no more Government payments will be made and no new CTFs can be established once all the issued vouchers have been used. However, CTFs set up for children born before 1 January 2011 will continue to run, as before, and additional contributions of up to £1,200 per annum will continue to be accepted into these accounts.
This seems a little unfair to those children born in 2011 onwards. Not only are they missing out on free Government money, but they will also be denied access to a tax-free savings account for children.
As a result the Save Child Savings Alliance has been formed to lobby the Government into retaining the structure of the CTF accounts, meaning that children could continue to have CTFs with up to £1,200 investment per annum, albeit without a Government handout.
The campaign is supported by a number of people and organisations, including two of the largest providers of CTFs (unsurprisingly). They quote statistics showing 74% of parents open a CTF account compared with 29% who open an ISA and 40% with a pension. Call me cynical but perhaps having free money to open an account with contributes to those higher figures.
However, it does raise the point as to whether the existing facilities available mean that an ongoing CTF account is not necessary.
The alternatives
The first alternative is a stakeholder pension. Anyone can have a stakeholder pension, so it is perfectly possible to invest in a stakeholder pension for your child instead of a CTF.
The advantages of a stakeholder over a CTF are that you can invest up to £3,600 per annum and that you get basic rate tax relief on the contribution, meaning that £3,600 investment only costs £2,880. The downside is that your child can only access the cash at retirement age- while it is anyone's guess what that age might be for children born now, it is certainly going to be older than 18.
Still, if you are a fan of the long game, even a modest investment now will become a tidy sum over 70 years.
The other quoted alternative is an ISA. However, under the current rules, only those over 16 can take out an ISA in their own name. Of course it is possible for you to take out a personal ISA and then donate the cash to your children at some future point, potentially a little older than 18 perhaps, but that does mean you are missing out on your own tax-free investment allowance.
Perhaps, therefore, an alternative to perpetuating the CTF could be to extend the ISA regime to allow investment for children, with protection such that there can be no withdrawals from the fund and it transfers into the child's own name at age 18? Or 21. Or 35.
Other things you could do include investing in a Friendly Society scheme, effectively an insurance bond that is tax exempt, where you can invest up to £300 per annum for each child. Alternatively, invest £25 to £3,000 per issue in NS&I's children's bonds for up to 5 years and earn up to 2.50% tax free.
What do you think? Is a CTF a viable investment vehicle? In which other ways do you invest for your children?
More from Sam Thewlis:
> Check out our Investing for Children discussion board and download free reports on child savings plans.
