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Govt money where its mouth is

Despite the seemingly endless changes to the way in which financial services products are charged, regulated and distributed, there are relatively few changes to the fundamental financial needs of the buyers of those products.

At the top of most people&#39s planning list will be financial independence. Wealth creation, management and preservation strategies should focus on achieving and maintaining that status. Sadly, it is achieved by relatively few.

Widening the population of those who are financially independent – and I readily accept that the definition of this will vary depending on the needs, expectations and aspirations of individuals – is one of the stated objectives of this Government.

Despite the inability of pension funds to reclaim tax credits on dividends (giving rise to an interesting dichotomy considering the general pro-pension utterances coming from Whitehall), the Government appears to recognise the importance of pension funding in the quest to create financial independence. Evidence comes in the shape of its public statements and, more tangibly, the tax relief it gives for pension contributions, tax freedom on the income and gains made in pension funds and tax-free cash paid in the commutation of a pension on retirement and on death before retirement.

Despite these generous reliefs, it seems to be accepted that too few of us are providing adequately for retirement and a different approach may be needed. That approach may end up being some element of compulsion but we shall see and that is not the point I wish to address in this article. What is the point? Well, until now, the Government appears to have been going down the tax incentive route to bring about a cultural shift in savings habits. However, with the Government&#39s announcement last year of a consultation on the proposed new child trust fund, along with the proposed savings gateway, incentivising savings by direct Government contribution appears to have been given a (Sandler-approved) new twist.

The principle behind this initiative is that if the Government kickstarts the savings habit from the time an individual is born, this priming of the savings pump stands a good chance of making personal savings flow into the future.

This is currently just a proposal but it is one that has some “previous”, so to speak, not so much in this country but in others and, in particular, the US. But the proposals for the child trust fund do not encompass restrictions on how the benefits should be spent. Such restrictions do exist in the US and this requires a high element of “micro-management”.

Our Government appears to have rejected this in favour of a simpler plan which involves contributing to the fund on a person&#39s birth and then at various times throughout their minority at, say, age five, 11 and 16. The amounts put forward for consideration (merely by way of example and with no commitment to actually contributing at this level) amount to a total “endowment” (regulators among the readership can sit down – the word is used in its much wider sense in this context) of about £800 at most and £400 at least. The higher figure would be contributed to funds for the benefit of children from less well-off families.

It is proposed that there will be no restriction on the use of the funds but that access will be prevented until a beneficiary reaches age 18. It is also proposed that others including parents and grandparents can contribute to the fund, which it is expected would be free of tax on income and gains.

However, it would seem that it is anticipated that there should be some limit on the amount of additional contributions that could be made to the child&#39s trust fund and the figure of £1,000 a year has been suggested.

As to who will run the funds, two suggestions are put forward, namely, a limited number of licensed providers or the open market. In either case, it is expected that there will be a wide range of investment possibilities (including cash and equities) permitted to underpin the trust funds.

I do not propose to go into the trust fund in any more detail but merely use it as evidence of the importance that the Government appears to attach to changing habits and possibly committing to this change financially. Whether the child trust fund actually comes to pass will depend on the outcome of the consultation and it is not expected that we should hear anything of substance before this year&#39s autumn spending review.

A recent trawl through developments on the child trust fund and savings gateway revealed the following:

•An update in this year&#39s Budget report on current thinking on the child trust fund and savings gateway.

•A Parliamentary question on May 24, answered by Ruth Kelly, which covered the issue of which financial institutions will be able to deliver the initiatives. It would seem that a single provider option is preferred for the savings gateway and an open market option for the child trust fund.

At the moment, there is nothing more concrete to report on either initiative.

Regardless of whether the child trust fund comes to pass, the publicity it receives will do no harm in elevating the importance of funding for the financial future of children.

Those of you who have dependent children will be fully aware of the costs involved in raising them, especially if they go on (as over a third do) to some form of further education.

Add to this the pressure that parents (who have themselves bought property) may feel when their children are looking to take their first step on the property ladder and find that they need a deposit, and you have a classic high anxiety area.

As has always been the case, looking towards one&#39s parents for funds before one looks towards the bank is a natural thing to do. As a parent, it is very hard to look away.

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