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Cutting the baby bonds

Chris Salih on Tory plans to axe child trust funds

The end may be near for child trust funds with Tory plans to tighten the screws on them.

Speaking at the Tory annual conference in Manchester last week, Shadow Chancellor George Osborne pledged to scrap most CTFs, offering them only to disabled children and the poorest third of families. He said the move would save £300m a year.

He said: “We will preserve child benefit, winter fuel payments and free TV licences. They are valued by millions. But child trust funds have not been as successful as many like myself hoped. We should continue paying them to the poorest families who often have no savings and encourage them to use them more but handing out new baby bonds to the rest of the country is a luxury we can no longer afford.”

The call comes as the CTF celebrated its seventh birthday. Although CTFs were launched on April 6, 2005, the earliest date for which CTF eligibility was set is September 2002. Children from lower-income households get an extra £250 top-up at birth and age seven.

That means the Government’s second round of payments has just been triggered and the outlay has been estimated at around £500m.
CTFs have had a mixed reception since launch and that is borne out in the figures.

On the one hand, the numbers opening accounts seem to have been positive. Ahead of CTF Week in January 2007, it was revealed that three- quarters of all parents were opening CTFs themselves and choosing their investments rather than waiting for the default option. However, the latest figures from HM Revenue and Customs show that under a third of all accounts opened have attracted additional contributions up to April 2007.

The Tory plan has met with a mixed response from the financial services sector.

The Investment Management Association says axing CTFs would damage the savings culture among young people.

Director of education Victoria Nye says: “CTFs are an ideal hook to encourage children to learn the importance of saving money. It is a lesson from which all children and, in time, the state finances will benefit, as more people save younger and for longer.

“Cutting CTFs would undermine the value of those lessons and could potentially halt further progress in promoting a savings culture among young people.”

F&C director Jason Hollands says spending cuts have to be made but when it comes to CTFs there is a concern of “throwing the baby out with the bathwater” since limiting or abolishing taxpayer-funded contributions need not mean closing these plans to voluntary contributions.
He says: “At F&C, we have consistently argued that there has been too much focus on the taxpayer -funded handouts when the real focus needs to be on encouraging people to change their own savings habits.”

“We would urge any incoming Government that is considering cutting back on the costs of CTFs, either by closing the scheme or limiting taxpayer vouchers to those on lowest incomes, not to prevent parents and grandparents who are willing to save their own money from doing so.”
However, some feel the Conservatives could have gone a step further and, like the Liberal Democrats, set out plans for the abolition of the scheme.

Hargreaves Lansdown head of research Mark Dampier says: “They should scrap CTFs entirely, as all Labour did was put the entire nation on benefits. How can they be funded at a time when the country is flat broke?”

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