As the pre-Budget statement looms, the focus will turn to child trust funds. When the Government published its proposals for the funds and the savings gateway before the general election, media interest did not focus on the details but rather on the fears that 18-year-olds would blow the money on having a good time.
If some commentators are to be believed, child trust funds would help the profits of Ibiza nightclub owners more than the prosperity of UK families.
This is a shame. The objective of developing a desire to save and invest throughout society is good for both government and the industry.
Child trust funds – where every child is given a lump sum at birth and additions at key stages as they grow up – may give the industry some commercial opportunities. If parents make regular additional contributions and the funds are well managed, the sum invested could grow significantly and offer a decent return to the fund manager over an 18-year period. However, this ignores the real importance of the fund – it will act as a spur to help the next generation develop into confident consumers of financial services. That is the long-term business opportunity, not the margins on the fund itself.
That is why we are urging the Government to ensure that the fund is kept simple and does not necessarily require detailed financial advice.
AMP is absolutely clear about the importance of advice but in this case making the child trust fund an advice-based product will undermine the Government's objectives.
Research clearly shows lower-income parents will not pay for advice even though in this case they are receiving money from the Government. As a result, they will either not take out a fund at all despite their entitlement or will lapse into a low-risk default option delivering lower growth. Either way, their children will be the losers.
The Government, industry and regulator should instead work together and develop a simple explanation-only sales regime that sets out the options open to the parents and asks them to nominate a provider. The alternative – discussing with an adviser how to select a provider – will be too expensive for the industry to deliver universally and impractical for many small savers.
So will future generations be squandering the state's money on just having a good time? One option is to follow the model of America's individual development accounts where people are restricted to spending the money on education. To this could be added such opportunities as buying a house or setting up a business. A fourth option might be to offer an incentive to reinvest the money in a financial product designed to meet the needs of young people but also to continue the savings habit and avoid the problems of youth indebtedness.
The part of the Govern-ment's proposals that was not debated back in May was the savings gateway. This aims to encourage saving among lower-income groups by offering the incentive of Government matched funding.
Again, the principle is sound. AMP's research has shown that current incentives to save, such as tax relief, generate little interest among lower-income groups and do little to encourage people to save. They are basically a privilege that benefits existing savers. Matched funding of savings accounts, on the other hand, has much greater appeal and can offer the opportunity to turn non-savers into savers.
The industry is right to be concerned about how the gateway can be made commercially viable. It will be targeted at small savers, contributing low premiums over a short period and there will probably be some restriction on charges. It is hard to see companies falling over themselves to market it.
One option for the Govern-ment is to say that if you want to market child trust funds you have to offer the savings gateway. That would be a mistake. Providers would simply turn away from the whole proposition. We all want to help create a savings culture but cannot afford to run with another loss-making product.
Rather than creating a new product, a more palatable alt-ernative would be to offer the matched funding through an Isa. To save the Government's blushes (once it has been ann-ounced, an idea is always hard to go back on), these could perhaps be called Gateway Isas. People paying below a certain amount in income tax would be able to claim matched funding from the Inland Revenue directly into their Isa up to a lifetime ceiling set by the Government.
The beauty of this proposal is that the industry does not have to invest in new systems or marketing literature. It would not have to cannibalise the existing Isa market as those eligible for the gateway are unlikely to have current Isas and customers would not have to make difficult decisions about what to do with their gateway after its term expires. The money could be simply left in the Isa to grow as normal.
This is an important point of detail and one that the Government has to get right if it is to achieve its objectives.