By Julian Crooks
Principal of The Financial Planning Service
The government is to give all newborn children as much as £500 in a child trust fund, hoping this will encourage saving. A leading independent financial adviser explains how the scheme will work.
Julian Crooks from The Financial Planning Service
The CTF will transform the landscape of saving for children.
From next April, an estimated 1.7 million UK families will receive vouchers, worth £250 to £500 a time.
This will be followed each month by the issue of 60,000 vouchers, one for each new born baby.
The big idea behind CTFs is that they will kick start a savings habit from a young age.
If invested properly and supplemented by additional payments made by family and even friends the CTF could be worth a tidy sum by the time the child turns 18.
Up to £1,200 each year can be paid into a child's CTF account.
What's more, money held in a CTF will be allowed to grow free of tax.
But, nevertheless, the CTF has its critics.
They say CTFs won't boost the UK's savings culture.
Those who can afford to save are already doing so and for those who can not afford to save the CTF will make no difference to additional saving.
But the doomsayers forget some key points.
Unlike, traditional vehicles for saving for children - such as unit trust funds and bonds - CTFs are simple to understand.
This should encourage savings where currently complex literature and concerns about tax have resulted in inertia.
Those people that at present save for their children tend to go for the safety first option of using bank and building society deposit accounts.
Savers are afraid of the notorious volatility of stock market investment. However, over the long term a child's savings would almost certainly be best off invested in the stock market because the performance is better.
The banks and building societies launching CTF savings accounts have recognised the desire amongst savers for safety and the need for the money to benefit from stock market growth.
As a result, we have seen is the launch of stakeholder CTF accounts.
These accounts will see the automatic switching from stock market investments into lower risk bonds and cash over the last five years of the life of the CTF.
This is one of the best features of the new CTF regime.
Suddenly we have stock market investment made palatable for the masses.
However, those that prefer the safety first option will still be able to opt for a deposit account.
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In addition, the CTF accounts are relatively inexpensive and the minimum contribution level, set at £10, is designed to appeal to lower income households or those with uncertainty as to disposable income.
We will not see an overnight change in habit, with all spenders suddenly become savers. However, I believe there is a good chance that at the margins we will see families begin to save where previously they did not.
However, there is a sting in the tail for those parents of children born before 1 September 2002.
These parents will not receive the CTF vouchers and this could cause some resentment and confusion. Particularly, in families where one child was born after 1 September 2002 and another before that date.
Under such circumstances the younger child will get the CTF, while the older sibling will not.
Not only will the older child miss out on the voucher but perhaps more importantly they will not be able to benefit from the tax-efficient and simple CTF savings regime.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.