The child trust fund is a major opportunity for everyone involved in
the financial services industry to start a new savings culture – a
culture that might have some chance of sticking.
While this big savings idea was in the 2001 Labour manifesto, it is
good to see it is now coming to fruition.
Parents, grandparents or other family members and friends can make
additional top-ups on top of the Government's contributions up to the
annual limit of £1,000.
It could be argued that if the Government wishes to promote savings
at an early age, there should be no annual limit. However, the
current Treasury-led consultation, which will last until the summer,
will be asking whether there should be further infusions of
Access to funds will be available at 18 and there will be no
restrictions on the use of the money.
Some commentators have said the money will just be blown on partying,
travelling and luxury goods rather than on further education or the
deposit on a first house.
Some have called for the money to be used only for educational
purposes at 18 and then rolled into an Isa before individuals can
decide for themselves at the more mature age of 25 what to do with
the rest of their fund.
There has been considerable debate over whether 18-year-olds are
mature enough to make the right decisions instead of just wasting the
fund. However, it would be rather difficult for the Government to put
restrictions on the way the money is spent.
There is a major initial hurdle for the savings industry to get over.
As the first funds are only expected to be available from early 2005,
the question remains, just what will providers be able to do in the
interim? Perhaps very little.
But some providers are keen to ensure that we take advantage of
current media momentum around the child trust fund.
Homeowners Friendly Society, which is intending to be one of the
first organisations to offer the child trust fund, wants to see this
momentum maintained and the Government to encourage feeder accounts.
It also wants to see significant advance publicity before 2005.
There have been clear indications from the Government that it is not
planning to use purely operational powers to create the child trust
fund but it is planning primary legislation. The first stage will
most probably take place in early autumn after the detailed
consultation period has ended.
A team will be formed to draft the likely legislation. This will
probably be formed by a mixture of Treasury, Inland Revenue and
possibly Department for Education and Skills officials.
We are then likely to see draft legislation produced for the Queen's
Speech in November. The first reading of any Bill would take place in
December or January. The second reading would be in the first three
months of 2004. Once the Bill has passed through its Parliamentary
hurdles – and it will – we would expect to see it given Royal Assent
and become law at this time next year.
One of the key points behind the concept of the child trust fund is
to start a savings habit at an early age. It is hoped that once the
child has learnt how to save, he or she will continue to do so for
the rest of their lives, making it less likely that they will need to
turn to the state for help.
By encouraging a good savings habit early on, it could go some way to
repairing the gaping hole in retirement funds and savings in general
that is so prevalent in society today.
People now in their 20s and 30s seem to have completely missed out on
the savings habit. These two generations are now the “credit
buddies”, spending what they do not have, putting everything on
plastic or extending loans and mortgages to finance their spendthrift
The child trust fund is the big chance for the Government and the
industry to recreate a savings culture where future generations will
not run into the same problems as their parents.
In the present climate, with all the problems surrounding pensions,
the plummeting savings ratio and continually increasing credit, the
child trust fund might just be the big idea that could salvage the
Government's desire to get the savings culture back on track.
Good promotion, forward planning and giving the public the simple and
necessary information they need is key to making the child trust fund
Equally important will be a positive response from all sectors of the industry.
The Government has said there will be open-market competition. Let us
make sure this is a new opportunity for savings and not another
Iain Anderson is a director and chief corporate counsel at Cicero Consulting