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Last Updated: Wednesday, 4 April 2007, 23:02 GMT 00:02 UK
Child trust funds hit not so terrible twos
By Julian Knight
Personal finance reporter, BBC News

The Hickman family
The Hickmans are enthusiastic about the child trust fund
Child Trust Funds (CTF), designed to give UK children a head start in life, are two-years-old.

The scheme was launched in a fanfare of publicity on 6 April 2005.

It is designed to give all children born after September 2002 - regardless of their background - a small cash lump sum which by the time they are 18 has grown into a whopping nest egg.

A total of 2.6 million CTF vouchers have been issued to date and proved popular with parents - after all, in essence, it's a freebie.

For Julian and Charmian Hickman from Farnham, the CTF provides a welcome opportunity to cushion the blow of higher education costs and higher house prices.

They have two children Iona, four, and Henry, two. The future financial hurdles Iona and Henry face are causing Mr and Mrs Hickman concern.

"The financial pressures on young people are far, far greater than when I was growing up," says Mr Hickman.

In my view, the Child Trust Fund needs to become a life-long incentivised savings vehicle
Julian Hickman

"I benefited from a university grant and there was no such thing as tuition fees. I am really keen that my children leave university with no debt.

"It would also be great if they could buy their own home. The past 20 years has shown us the value of having property, if they could use their CTF cash for this that would be a good thing," he adds.

But no matter how cleverly invested, a 250 handout is unlikely to cover university costs 15 years from today, nor is it going to buy much in the way of a home.

Life-long vehicle

Mr Hickman believes that the nature of CTFs needs to change. The whole project should become more ambitious.

"It is a good start, but this thing should not just stop at 18, when the child has the right to access their CTF," he says.

"In my view, the Child Trust Fund needs to become a life-long incentivised savings vehicle.

"People should be able to build up a CTF and access funds from it when they need to cover a deposit on a home or meet university tuition fees, but then keep it going into old-age," Mr Hickman adds.

The government recently made moves towards this when it announced that people would be permitted to roll their CTFs into an Individual Savings Account (ISA) at age 18.

In effect, this means that people not wanting to use their CTF money at age 18 will be able to keep it shielded from the tax man for as long as they wish.

The Hickmans are paying extra into Iona and Henry's CTF.

Topping-up can make a substantial difference, the Children's Mutual has estimated that a CTF opened with a 250 voucher two years ago and topped-up to the tune of 24 a month is already worth 1,000 on average.

Complexity

However, not every parent has embraced CTFs in the same way as the Hickman's.

Official figures show, that despite millions being spent marketing CTFs, a quarter of all vouchers are not invested by parents.

The parents or guardian have a year from when the voucher is issued to invest it in an approved scheme.

There are dozens of these approved plans to choose from, offered by banks, building societies and other financial institutions.

Savings plans have their annual management charges capped at 1.5%; while some invest in the stockmarket and others are straightforward deposit accounts.

If the parent or guardian forgets to invest the voucher within a year of issue it is automatically shunted into a default CTF.

Mr Hickman, who works in the City of London, blames complexity for poor take-up.

"I can see why people would be slightly bemused by the whole investment process," he says.

"There is a definite lack of transparency out there.

"Take the charges levied by the providers, you really have to read the small print and understand jargon to see how much a CTF is actually costing," Mr Hickman adds.

People who would never have had any form of children's savings in place now have something quite substantial
David White, Children's Mutual

Yet according to the Institute of Public Policy Research (IPPR), which was heavily involved in formulating the CTF, the advent of CTF's has given a kick-start to childrens' savings.

Around a third of all CTFs opened are topped-up with regular monthly payments, usually from parents.

And according to Children's Mutual, top-ups are not just the preserve of the rich, between 20% and 30% of their low income customers are making additional contributions to a CTF.

It seems, CTFs are popular across all social groupings.

Dr Rajiv Prabhakar of the London School of Economics recently questioned parents over their attitude to the CTF.

He found that when given the choice between an enhanced child benefit payment and a child trust fund, the majority in his focus groups went for the CTF option.

"CTFs are having a real effect on UK savings culture," says David White chief executive of the Children's Mutual, one of the UK's biggest provider of CTF accounts.

"People who would never have had any form of children's savings in place now have something quite substantial. In addition, both parents and children are gaining a financial education from the whole CTF process."

CHILD TRUST FUND FACTS
The government gives parents or guardians of all children born after September 2002 a voucher worth a minimum 250.
If the parents are in receipt of child tax credit then the CTF voucher is worth 500.
The government has pledged to top-up the initial CTF voucher with a further 250 payment at age seven.
Parents, grandparents, family and friends can pay in extra cash, up to 1,200 per year, into the CTF plan to boost its value.
Child Trust Fund helpline 0845 902 1470

Revolutionary

When first mooted, CTFs were seen by some experts as quite revolutionary.

For the first time government money - in the form of the initial CTF voucher - was to be trusted to the vagaries of the stockmarket to produce a social good.

The same approach, the left-wing think-tank the IPPR suggested, could be used to target all sorts of groups of people.

For example, it is planned that children in care are to have their CTF toped-up by local authorities so to give them a better start in life.

In addition, campaigners are lobbying the government to match contributions made by low income families into CTFs.

But what the IPPR dubbed the 'asset based approach' to welfare seems to have run out of steam, perhaps due to tightening of government finances.

Money wasted

As it enters its third year, CTFs are not without their critics.

Vince Cable, Liberal Democrat Treasury spokesman, has called for CTFs to be scrapped.

A mother and baby
New born babies receive vouchers worth at least 250

Chief amongst Mr Cable's gripes are that CTFs are poorly targeted as all families, regardless of income, benefit.

In addition, Mr Cable has argued that the provision that children get unlimited access to their CTF at age 18 is fundamental flaw.

What is to stop them "wasting" their CTF cash on a couple of weeks in the sun for example?

With such political opposition and increasing constraints on national finances, Mr Hickman does not hold out much hope for the long term prospects of CTFs.

"I do not trust politicians to see this through. When I discuss CTFs with friends, the overwhelming view is take advantage of it while it is still available," he says.

But according to Mr White, woe-betide any government choosing to scrap CTFs.

"By the time of the next election millions of families will be benefiting from CTFs and won't vote for a party looking to deny others the opportunity," he says.

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