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Child benefits

Child trust funds may be free money but figures released by HM Revenue & Customs show that one in four parents are still not using the vouchers.

Designed to kickstart the savings habit for new parents, the vouchers give £250 to each new child to be invested on their behalf until age 18 when they can access the funds. But despite Government research showing there is a near-universal awareness of the scheme, 26 per cent of parents are not opening accounts.

Treasury Economic Secretary Ian Pearson concedes that more needs to be done to raise the profile of CTFs and he has written to all MPs to encourage them to do this.

Of particular concern is the high number of poorer families who do not actively use the vouchers. Family Investments head of savings and investments Kate Baker says this is worrying as CTFs are designed to help these families the most.

If parents do not use the voucher within a year, the money is not lost but is allocated automatically by HMRC. But Baker says that once an account has fallen into the revenue allocation system, it is less likely to receive additional contributions.

If so many people are aware of the scheme – the Government claims 97 per cent awareness – why are one in four parents failing to open accounts for their children? Baker believes it is because the CTF system is too complex and has too much choice involved.

She says: “Parents are tired when they get the vouchers. In the first few months of having a new child, eating and sleeping is the key thing on their minds. With CTFs, not only do they have to decide between three different product types but they also have to choose between the 60 providers and distributors available.

“It is a daunting task and it does weigh on people’s minds. It is easier to put off the decision.”

The three products on offer are a stakeholder account, cash account and a non-stakeholder equity account. Baker believes there would be greater take-up of the vouchers if only one clear option was given to parents.

Baker says: “Cash accounts have no real benefit and are almost certain to underperform stakeholder products in the long-term. Every provider has a stakeholder account and it appears to be the preferred Government option, so why not just use it?”

The deadline of a year has also been criticised for being too long as parents will keep delaying the decision and may forget to send off the voucher. Family Investments believes shortening the deadline to three months would encourage a decision to be made more quickly.

The company believes that incentives for early take-up of the CTF via a gift or prize draw would increase the number of parents opening accounts.

But despite the concerns over the take-up rate, there is some good news for CTFs.

Children’s Mutual chief executive David White says CTFs have increased savings rates and the economic downturn has not seen parents reduce their top-up payments to the accounts.

He says: “Half of all our accounts receive additional regular or lump-sum contributions made by family and friends, this is nearly three times the pre-CTF family saving average.”

White believes that further take-up will be encouraged by the introduction of a system in April next year where the physical voucher will not have to be collected by the provider. This will mean parents can open accounts online or over the phone without having to send off the voucher.

He says the average monthly top-up into a Children’s Mutual CTF is £24, which would mean a fund is worth £9,750 when the child reaches 18.

Baker agrees that economic conditions do not seem to have affected the number of parents topping up CTFs and around 35 per cent of accounts with Family Investments have a regular direct debit set up.

Figures released by the Tax Incentivised Savings Association would appear to back this view. In its quarterly survey this month, Tisa found there has been a continuing increase in regular and lump-sum contribution levels into CTFs, with average monthly subscriptions rising slightly from £21.86 for the second quarter to £21.95 in the third quarter of this year. The average lump sum rose to £508 from £488.

Tisa director general Tony Vine-Lott says: “More and more parents are recognising that their children will have a better start as young adults if they have some savings behind them. This is something that other family members and friends can help out with too, either through lump-sum contributions or a commitment to regular savings. This is one trend that we can hope will continue for a long time – long enough to set an example for the next generation to follow.”

But Throgmorton Financial Services regional manager Colin Rothery sees a different side to CTFs. He thinks they are a good idea in theory but says the biggest problem is the reluctance of people to top up their accounts.

He says: “People with young children are financially stretched and everyone is feeling the squeeze. They may start with good intentions but this will often fall by the wayside and they may become dormant accounts.”

Rothery says the danger is that if accounts are not topped up, when the child turns 18 and only has access to a small amount of money, they are likely to just spend it on a holiday.

He says they have seen almost a complete drying up of investing for children in recent years, which used to be common a decade or more ago, and CTFs remain a fringe issue for IFAs.

“We have never marketed to people with new children. Maybe we should have done, as their circumstances have probably changed. The problem is that advisers have little financial motivation to become too heavily involved in CTFs.”

Facts & Figures managing director Simon Webster believes the theory behind CTFs is flawed and says it is an admin nightmare.

He says: “Administering these small lump sums of £250 is an obscene waste of taxpayers’ money. They probably cost as much to administer as the money that goes into them. The Government would be much better off increasing child benefit instead. I do not know anybody who would recommend putting proper money into these accounts.”

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