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Thursday, 26 April, 2001, 14:33 GMT 15:33 UK
The value of baby's bonus

The government has promised hundreds of pounds in a trust fund for every new born baby. BBC News Online's Briony Hale looks at how much these investments could be worth.

While British babies are cooing happily in their cots about the government's promised birthday present, parents are reaching for calculators and scratching their heads over investment strategies and real term returns.

The government's proposal to give babies lump sum cash gifts is a highly unusual way of encouraging savings.

Normally, savings incentives are based on tax-free benefits, probably because giving people a lump sum of money creates a host of investment dilemmas.

The baby's windfall in later life could vary significantly in value depending on the parent's choice of investment.

And the government itself is still chewing over a number of different ways of implementing its baby bonus scheme.

Doing the sums

The first option that the government is considering is to give each baby in lower income families 500 at birth, and an extra 100 at their fifth, eleventh and sixteenth birthdays - a total of 800.

Baby Jane's 18th birthday windfall
500 at birth
300 in top-ups
1,200 in building society OR
2,000 in stock market
Invested in the stock markets, this should then grow into 3,600 over eighteen years.

Taking inflation into account that would be worth about 2,000, assuming a real return of 7%.

If the parents plumped for a safer strategy, real term savings in a building society would yield 1,200.

Another investment option under consideration is that the lump sum is invested in a mix of cash, bonds and shares in order to spread the risk.

The government proposes that the savings are administered through a fund manager, and that parents will receive advice from an independent expert to help clarify strategies.

More affluent families would receive half of the amount - a 250 lump sum and three 50 top ups later on.

A pound for a pound

The second option that the government is considering works on the "something for something" theory where the government rewards savings efforts.

During a three-year period, the government could match savings pound for pound in a tax-free scheme.

Baby Anne's real term windfall after 3 years (2.5% interest)
25/month from parents
25/month from government
1,870 cash pile
If baby Anne's parents saved 25 a month for three years, this would be matched by the government and add up to 1,870 in real terms, given an interest rate of 2.5%.

After the three years are up, the money could be transferred to a further savings scheme such as an Individual Savings Account (Isa).

More headaches

The economics of investment is not the only potential headache looming on the horizon.

The whole thing could turn into an organisational nightmare for the government.

Proposed spending remits
university fees
house deposit
start a business
worldwide travel
carry on saving
In an attempt to try and avoid babies Jane and Anne blowing all their money on an eighteenth birthday bash, the government is considering imposing restrictions on how the money is spent.

Suggested areas for spending includes university fees, a deposit for a house or starting a new business.

But the government has already admitted that trying to implement this sort of control would be very difficult.

"Not fair"

Some parents are also bracing themselves to hear the familiar refrain of "that's not fair".

Families with one child now and one on the way could find themselves left in the tricky situation of having a savings account for one child but not the other.

"That could be a real problem," said Caroline Johnston a mother of one, hoping for more.

Nevertheless, the Johnston family warmed to the plan, saying that it would encourage savings from themselves and the wider family.

"If you ever have 500 cash available, there's a temptation to go and buy something needed like a pushchair rather than to save it," said proud father Paul.

But although welcomed as a good idea, the suspicions are already creeping in that the baby give-away could herald future government cuts on student grants or child welfare.

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26 Apr 01 | UK Politics
Blair banks on baby savings scheme
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