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Baby bond boomers

“Give me a child of seven and you have the man for life.” So said the Jesuits. And it is to this logic that the Labour Government is appealing with its proposal for a child trust fund.

Those looking for clues to understand how the Govern-ment views financial services and possible future policy direction should be looking at the document in which this was set out, believes Aifa director general Paul Smee.

Last time round, the big ideas were the establishment of a unified regulator in the FSA and low-cost pensions through stakeholder. The Government&#39s new big idea for financial services is set out in Saving and Assets for All and is showcased in the seemingly innocuous statement “financial assets should be the preserve of the many not the few”.

Grandly launched at Number 10 by Tony Blair flanked by senior cabinet colleagues, the Saving and Assets for All initiative received widespread coverage. But while “baby bonds”, as the press soon dubbed the child trust fund, were widely reported, this was only half of the proposal.

At the same time, the saving gateway was proposed, which matches the savings of someone on low income pound for pound up to an annual limit of £600.

Baby bonds are, in fact,a trade mark of Tunbridge Wells Equitable Friendly Soc-iety, a fact that the society has been politely reminding commentators. It has, in fact, been selling its baby bond with-profits endowment through IFAs for 15 years. Uniquely, friendly societies can issue bonds in the child&#39s name who benefit from a limited tax concession.

This history has led to Twefs being rewarded by close consultation with the Government on the child trust fund.

Saving and Assets for All sets out the Government&#39s understanding of what is has already done. Isas and stakeholder are to encourage savings from lower and moderate earners, and the pension credit is there to encourage pensioners to save or carrying on working.

On the creation of the FSA out of the Financial Services and Markets Act, the paper singles out the new regulator&#39s “statutory obligation to promote public understanding” and increase financial literacy.

According to Smee, the impact of these proposals are “ecological rather than commercial”. They establish a mood music that IFAs would do well to listen to. However, Smee accepts that not all IFAs will want to be part of the proposal.

The danger with the proposals as they stand is that IFAs could be excluded and left behind. “I hope we can change the detail so the proposal does not exclude the opportunity for IFAs to co-operate,” says Smee.

The question of advice is also highlighted by a potential provider of child trust funds. Twefs product manager Jill Lewis-Ranwell says: “The people who are most going to benefit from the child trust funds are also those most in need of advice.”

But here again, many think that the Government will be caught in the same quandary it encountered in developing stakeholder. If, as is likely, there is a very tight charging structure and, in view of the relatively small amounts involved, the Government will have to answer how advice will be remunerated.

Lewis-Ranwell points out that many, however, would be wise to view these as the investors of the future and a potential client base that they would be unwise to ignore.

It has already been mooted that IFAs might also want to have some scheme in place which will enable them to advise child trust fund investors.

In a recent interview with Money Marketing, Alistair Darling, now Work and Pensions Secretary, was keen not to exclude IFAs from the proposal. He said: “Our proposal for the child trust fund and the new savings gateway are aimed not only at spreading financial wealth more widely, but also at increasing financial awareness.

“As with any financial decision, people should have the advice that is appropriate to them. That may well be from an independent financial adviser, who may find that the average age of their customers goes down, as every 18 year old has a trust fund.”

In addition to advice, a challenge for the Government will be to make this initiative benefit its target – those on the lowest incomes who are not presently saving. Like stakeholder, it could have the unintended effect of benefiting a different – and more financially secure – sector of the population.

The Government paper cites its own research showing “young people without assets are more likely to have lower earnings, higher unemployment and poorer life-chances overall”.

While some might see the logic of the sentence inverted – the poor are by definition unlikely to have assets – the Government, referring to an American scheme want to encourage the saving habit suggesting that it encourages greater self-reliance.

Commentators point out that all the Treasury&#39s illustrations presume additional contributions. Without these, Twefs predicts that on a projection rate of 7 per cent a fund would only be worth £1,103.

However, when one considers that around 700,000 children are born every year, it is apparent that considerable sums are involved.

Children of low-income parents will qualify for an initial endowment of £500, those of wealthier parents will get half.

When the additional contributions are taken into account, it is clear there will be providers eager to get their hands on the large sums involved.

Consumers&#39 Association senior policy adviser Mick McAteer questions whether financial services are fit for the job. He says: “People might be tempted by bonds offered by the insurance companies. All major scandals in the last 10 years have come from the insurance industry. If the Government wants to use the industry, it needs to knock them into shape before it gets taxpayers&#39 money.”

The withering away of the welfare state has been a theme for some time expressed by private pension providers and advisers. But the same is happening in respect of the young, who are finding that the costs of higher education will need careful financial planning.

Just as with long-term care, tuition fees may well represent a privation that offers new opportunities for IFAs.

The Institute for Fiscal Studies has examined the proposals, noting they mark a shift to “asset-based” welfare. It also notes the proposals go hand in hand with financial education, which some IFAs will view with suspicion as an attempt to sideline financial advice.

Similar again to the debates on stakeholder, where it has been suggested that many would be unwise to purchase the pension, the IFS questions whether low-income households are actually best served by saving. Most IFAs would say this highlights the need for advice.

Children of low-income parents will qualify for an initial endowment of £500, those of wealthier parents will get half


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