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A birthday gift for everyone

Last week, the Government announced plans to introduce the child trust fund. These plans come after nearly two years of debate on asset-backed welfare policies.

AMP has been involved with the scheme since the idea was first mooted in the UK in 1999 after a similar scheme was introduced in the US. We were the principal sponsor and have been an active participant in the research carried out by the Institute of Public Policy Research that led to the development of the scheme.

We believe this policy has the potential to change the UK savings culture. The child trust will provide a lump sum of between £250 and £500 (dependent on means testing) to all children at birth.

The money will be kept in special accounts until they reach adulthood, with public funded top-ups at six, 11, and 16. The idea is to offer access to the opportunities that asset ownership brings.

The scheme will also offer parents, relatives and children the opportunity to make additional contributions to the fund. Lower-income-earners will be given further incentives to save by the Government offering to match savings with additional contributions.

How these funds will be run is yet to be decided. One possibility is they could be run by the private sector under terms and conditions laid down by Government (much as stakeholder pensions).

Parents could open an account when they register the birth of their new youngster. They would then choose a fund provider.

The concept of child trust funds offers a chance to generate financial responsibility and a culture of savings that the UK currently lacks. It will also help to quash problems of financial exclusion.

As the children mature and start to handle their own sources of income – whether from pocket money, Christmas presents or part-time work – they too will take an active interest in their trust fund.

They will want to see it grow and they will realise that it can grow faster by adding money to the account through saving. They will grow up with an understanding of money and an appreciation of their responsibility to look after their own financial welfare.

If statements were sent on a regular basis showing the growth in the fund, it could further encourage the child. Schools could incorporate the plan and as part of their studies children could follow the fortunes of their investments.

Financial service companies will clearly have a role to play in offering solutions that could make this proposition affordable. But more important, the industry has a vested interest in embracing any proposal that could develop positive values and responsibilities and overcome financial exclusion in the simplest way, by making the poorer sections of society a viable commercial market.

As the children near adulthood we can expect the financial services industry to take an active interest in this maturing pool of wealth.

There is much current criticism of the industry for its failure to address in an inclusive way the needs of the population. The advent of child trust funds will ensure that financial services companies have a commercial interest in delivering services to all children, whatever their income level.

While rules would need to apply, there is no reason why providers should not be marketing university fee drawdown accounts or first-start mortgage packages to schools in every inner city estate.

At the other end of the contract too, providers will be marketing their trust funds to every prospective parent in the country, the “financially excluded” will have become market participants. In this way, the child trust fund will not simply offer a once-in-a-lifetime act of wealth redistribution. It should inspire and inculcate a lifetime of financial responsibility.

The basic premise is that in trusting people to manage money that they can see grow, but cannot spend, they will start to think more actively about financial responsibility.

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