What next for child trust funds?

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• Published: 27 Jan 2010 in Money and Savings

By Sharon Flaherty

Child Trust Funds (CTFs) were introduced by the government in 2005 to give children a good financial start in life, and in the few years since they’ve launched, the take-up has been ever increasing.

According to The Children’s Mutual – a provider of child trust funds - nearly 75 per cent of parents in the UK have chosen to open a child trust fund proactively, with their now being around 4.4 million child trust funds in existence.

The Children’s Mutual believes this demonstrates that parents really do want to engage with saving for their children, an opinion which is supported by the fact that nearly 50 per cent of its customers contribute an average of £24 a month into their child’s trust fund account.

So what are child trust funds?

A child trust fund is basically a long-term savings and investment account which a parent can set up for their child, and from which the child cannot withdraw money until they turn 18.

To kick-start the savings habit, the government contributes £250 in the form of a voucher to each child’s account, with a further top-up of £250 when the child reaches age seven. For lower income families, an additional £500 will be paid directly into the child trust fund also around the time of the seventh birthday.

How popular have they been?

According to HM Revenue & Customs, there are now over 4.8 million children with child trust funds and over 2 million parents are making monthly contributions into them.* Other recent figures show that in excess of £16 million a month is being saved into child trust funds in this country.**

But despite all the positive noise around the accounts, politics may be about to get in the way with the Conservative Party suggesting change is on the way.

What is the future for child trust funds?

The party has suggested that the take-up of child trust funds has been predominantly by higher income families, contradicting initial promises made at launch by prime minister, Gordon Brown that the accounts would “benefit all young people.”

In fact, the Conservative Party says that only 69 per cent of families who live in deprived areas claim what is essentially free money, compared with 83 per cent in the wealthiest constituencies.

If elected into government, the Conservatives say they will look to continue paying vouchers to the poorest families but that “handing out new baby bonds to the rest of the country is a luxury we can no longer afford."

But one player active in the child trust fund world and which does not agree with the Conservative’s potential plans is The Children’s Mutual, which believes lower income families are benefitting widely from the government’s child trust fund scheme.

In fact the mutual claims that around 50 per cent of the government child trust fund investment is going to 1.5 million families on the lowest incomes (earning under £15,000).

It also says families in the lowest income bracket are saving a higher proportion of their household income for their children than those in more affluent groupings.

Tony Anderson, marketing director of The Children’s Mutual, said: “People who are less well-off are saving a greater proportion of their income into the child trust fund. We are talking to the Conservative’s about this.”

To read what the chief executive of The Children’s Mutual has to say on the topic of child trust funds, click here and add your thoughts.

* HM Revenue & Customs

** Tax Incentivised Savings Association