Child Trust Funds (government payments of £250 at birth and age 7 into an investment plan) are likely to be scrapped for all families with an income of more than £16,000, if the Conservatives stick to their manifesto pledge.
The Lib Dems wanted to to scrap them entirely. The coalition government is yet to announce what it will do.
In a new document today - The Coalition: Our Programme for Government - there was still a lack of detail, stating only: 'We will reduce spending on the Child Trust Fund and tax credits for higher earners.'
For and against CTFs
Fans of CTFs argue that they are key to teaching a new generation how to save.
Opponents say they are too big a cost in the age of austerity.
The SMF plan for saving CTFs for middle income families
Today, a think-tank today suggested a way to make CTFs 'work better for much less money'.
The Social Market Foundation argues that the cost of the scheme could be reduced by two-thirds by cutting the value of the CTF voucher given to each child at birth from £250 to £50 and scrapping the second contribution on a child’s 7th birthday.
To better encourage saving in the CTF, the government should match families’ contributions up to £50 per year up to age 5 funded by axing tax relief on all non-CTF children’s savings, it says.
The SMF argues: 'With reform, Child Trust Funds can achieve important policy objectives for the government widening financial engagement particularly amongst the less well paid, encouraging saving and giving all young people a financial stake in the future.'
The think-tank says that in contrast, other children’s savings accounts, which benefit from tax-relief, are typically used by wealthier households to shelter their savings from the taxman: government figures show that half of all children do not have any financial assets of their own.
To cut the annual cost of the Child Trust Fund policy, the SMF says the government should:
- - Abolish universal CTF payments for seven year olds, saving £218.5m;
- - Reduce the value of universal payments at birth to £50, and the value of additional awards for lower-income households to £200, saving £153m;
- - Abolish tax-relief on non-CTF children’s savings accounts for under-16s, saving the Exchequer £181.4 million, and recycle this saving to fund the cost of CTFs.
To improve saving rates and active engagement with Child Trust Funds (CTFs) among lower-income households, the SMF says the government should:
- - Simplify choices around opening a CTF account; - Develop behavioural interventions, such as direct-debit schemes;
- - Impose restrictions on how Child Trust Funds can be used at the age of 18;
- - Make receipt of full voucher entitlements among low-income households conditional on using financial advice
- - Strengthen the role of the CTF in citizenship policy;
- - Implement matching contributions for low-income households up to £50 each year for the first five years of a child’s life, at a cost of £165m per annum.
My view
Speaking as an investor in two Child Trust Funds, I accept that doling out a total of £500 on Britain's richest kids is a nonsense. But entirely scrapping the scheme entirely for middle income families is throwing out the baby with the bathwater - especially if the Coalition government is to tranform Britons from consumer-obsessed spenders into shrewd savers.
My elder child will soon be at an age where I can explain why he's the proud owner of a growing investment account. Millions of other children will also be having the same conversations - without Child Trust Funds, that learning process would not be happening. Let us know what you think [Do you agree with the SMF's plan for CTF's?] and put your view in the comments box below.
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