You may not have noticed but last week was the first Child Trust Fund Week.
The Government is trying to encourage parents to make regular contributions to CTFs and generally educate their children about money.
But many remain sceptical that CTFs are the best use of Government money and believe that dismal financial literacy is the issue needing immediate attention.
CTFs were introduced in 2005 and give all children born in the UK on or after September 1, 2002 a 250 voucher to kick off a savings account and another 250 when the child turns seven. Children in low-income families receive double that sum. The idea is that parents and relatives contribute regularly to the account so that by age 18 the child has enough money to make a significant contribution to their university degree or a deposit on a house.
Yet over 25 per cent of CTFs are set up by the Government because parents have failed to do so. Many parents and family members also fail to make regular contributions.
Many IFAs claim that lack of financial education among parents is the major reason for the scheme’s lukewarm success and believe that CTFs will be a waste of taxpayers’ money until the Government improves financial literacy.
Liberal Democrat Shadow Chancellor Vince Cable claims the scheme has failed to interest the people it is designed to help most.
He says: “While the CTF is well intentioned, the substantial amounts of Government money involved would be better used for other purposes, particularly education. There is nothing to stop children spending it on a cheap holiday when they are 18 rather than invest it in their education.”
Hargreaves Lansdown head of research Mark Dampier says: “CTFs are a total waste of taxpayers’ money. They are not a great way of teaching children about savings. They should be using their own money. I think a huge amount of this money will be put into a bar bill at university.”
Informed Choice managing director Nick Bamford claims that CTFs are a step in the right direction to get children saving from an early age and believes that underprivileged children will be better off.
He says: “Everything we do to encourage a savings culture must be good. Chancellor Gordon Brown is trying to address child poverty. At least he is doing something. It is great for those children not in a privileged position.”
But Bamford is concerned about the poor state of financial literacy in the UK. He says: “CTFs came out in a blaze of publicity but is there a constant and consistent message going out about how to use them? I do not think so. We need a better educated public. We need educated people to recognise that the CTF is not just a one-off cheque from the Government but is an opportunity for parents to give their kids a good start in life.”
Dampier fears the nation’s financial knowledge is too abysmal to be improved by a Child Trust Fund Week. He claims that, when the public do not understand compound interest, their financial knowledge needs to improve dramatically before schemes such as the CTF will be successful as they do not understand how to use them to full potential.
Dampier says: “Twentyfive per cent of parents are not even taking out a CTF. Parents are poorly equipped to make these choices. People are coming out of school and have no idea how the capital markets work.
“Education is the heart of what this Government wants but it is loading more debt on students and house prices are increasing. CTFs are another example of the Government putting the cart before the horse.”
Most parents are putting the CTF vouchers into savings accounts and shying away from investing in equities.
Bamford says: “Putting the money in a savings account would be seen like the safest thing to do but the child is actually missing out on great investment opportunities. People getting advice will be more likely to invest their child’s grant while people without advice will probably keep it in a deposit account.”
He says parents are more cautious about investing money for their children than they are for themselves.
Dampier says: “Fund choice is critically important and none of these people are equipped to do it as the Government is not teaching anyone. Eighteen years is an ideal timeframe for an investment because there is hardly any risk and it is 500 of free money.
“But people are not going to be equipped to make use of the choices they have and I think that is a crying shame.”