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Iasa for life

Last April we heard about proposals for the somewhat radical child trust fund in the Government&#39s consultation paper, Saving and Assets for All.

The stakes were raised when the Government then committed itself to the concept in its election manifesto. This scheme, more widely known as the baby bond, would provide a savings pot for every child born in the UK.

The idea is that by the time it matures at age 18 the fund will have grown into a substantial sum, markets and interest rates permitting. This would ensure a sound financial launch pad for every young adult, regardless of their start in life. The proposed main features include:

a centrally managed set-up process, linked to child benefit systems,

a progressive endowment at birth, with additional Government top-ups at five, 11 and 16,

additional contributions by saver and family/friends up to an annual limit,

investment of assets in a wide range of vehicles, including equities,

no access to assets until account maturity at age 18,

no restrictions on use of assets at maturity, and

financial education to be integrated into the CTF account through providers and school curriculum.

The Government received a big mailbag of responses to the report and has subsequently published a further consultation – Delivering Saving and Assets for All.

This second paper consults the industry on the more detailed points of delivering the scheme. The Pep and Isa Managers&#39 Association responded to the Government last week.

We believe the best veh-icle for the CTF would be the now tried and tested Isa as part of a family of Isas, designed to provide the saver with “cradle to grave” Isa coverage.

The Isa is the best vehicle for this investment and using it as the wrapper for the CTF would fit nicely with the recent drive to simplify the investment process. Investors now understand Isas – another new and complex savings scheme is unnecessary and could be detrimental to the popularity and successful launch of the CTF.

The Isa has in-built credibility. It affords an opportunity to educate and familiarise children with a savings vehicle which can continue to be used for the rest of their lives.

This knowledge and understanding will be gained early enough to make a real impact on lifetime savings habits of the next generation.

Other points made in the Pima submission were that entry to the CTF ought to be open to all children, avoiding discrimination against those born before the scheme takes effect. Logistically, this might mean entry at the defined subscription ages (five, 11 and 16).

We would also like to be involved in the delivery of a substantial education package, presented in schools and elsewhere, to develop a better understanding of the new product.

Pima believes that the CTF should incorporate all the best features of the Isa:

maximum transparency of charges and investments,

ability to make additional subscriptions on a lump-sum or regular contribution basis up to the annual limit, and

portability – to enable a broad range of providers, encouraging high levels of service and performance.

As the CTF will be a long-term investment veh-icle, we would expect it to be subject to rules very similar to the current Isa in order that the investor is able to maximise savings.

All this would mean that our other recommendation – it is proposed there is an opportunity to “roll” the CTF into an Isa on maturity, at age 18 – is a straightforward and logical process.

Pima supports the Government&#39s objectives. The only potential issue we have is with the progressive endowment element, which implies an undefined degree of “means testing”, a measure which we believe may be unnecessarily discriminatory – not to mention an unwieldy administrative burden. This aside, we strongly believe that it is best to wrap the baby bond in an Isa cradle. We hope the Government agrees.

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