Are child trust funds worth saving from the chop?
At its party conference, the Conservative Party announced it would scrap child trust funds (CTFs) for many UK families, saying only families who earn below £17,000 or have a child with a disability would still be eligible for a CTF.
Meanwhile, the Liberal Democrat Party has called for the complete abolition of the scheme.
But do CTFs have a valid role to play in helping the next generation save for tomorrow?
Yes says: Kate Moore, head of savings and investments at Family Investments
The CTF has been a crucial innovation in public policy that is making a major difference to the ways in which families save for their children’s futures. The simple fact is that because of the scheme, more children than ever will be starting their adult life with a financial asset.
One of the original objectives of the CTF scheme was to underpin a savings culture in a heavily debt-ridden society. This objective is clearly being achieved. There are now 11 million adults paying into 4.5 million open CTF accounts, covering families from all parts of the country and all walks of life.
Already a third of all CTF accounts receive regular top-ups and this should only increase as a family’s income improves when mothers return to full-time work as their children get older. More than £22 million is being invested in CTF accounts every month. At this rate, over the lifespan of a CTF, parents, family and friends will contribute double the amount the government has.
The positive impact of providing every single child with a financial asset when they begin adulthood cannot be underestimated. It provides an opportunity for young adults to improve their situation and prospects. This may come in the form of a getting a foot on the housing ladder, or funding for further education or training.
However, it is not simply the financial implications for individuals and society as a whole that make the CTF so invaluable. By its very nature, the CTF has the potential to play a key role in driving financial literacy and dialogue (among children, parents and between the generations within families); fostering a sense of personal responsibility; galvanising family engagement with financial planning; and fostering a long-term savings culture that the UK so badly lacks.
No says: Danny Cox, head of advice at Hargreaves Lansdow
CTFs are a decent idea in principal but are ineffective in practice. At the core of the CTF’s aims is to provide the stimulus for the child’s financial education and saving. Gifting money to a child at 18 when they have had no involvement in its creation is unlikely to be the best way to do this.
The best learning requires experience and the child should have greater involvement in their CTF through the national curriculum.
Also, £250 at birth followed by £250 at age seven is a relatively small amount of money: too small to get most of the investment industry interested or to cover the cost of financial advice.
This means the range of products available is small and those who need the most help cannot get advice. This is probably one of the reasons why an estimated 25% of the vouchers issued have not resulted in a pro-active investment decision.
Once the voucher is invested there are many far superior alternatives for additional savings. Open-ended investment companies or unit trusts set up through a fund supermarket offer far greater choice and access to better fund managers.
The age of receipt is also an issue for some. Legal responsibility is achieved at the age of 18 but most would agree this isn’t the age for financial maturity. It calls into question what the CTF money will be spent on.The average 18-year-old will probably spend their money on late nights, takeaways and the latest mobile phone. That said, despite the inefficiencies, having a CTF system will have a positive impact on some people, making the situation better than before.
Let’s face it, there are two types of people: savers and spenders. For the spenders, compulsory savings has to be the answer. Otherwise they are subsidised by the savers.
A type of derivative often lumped together with options, but slightly different. The original derivative was a future used by farmers to set the price of their produce in advance before they sowed the seeds so that after the harvest, crops would be sold at the pre-agreed price no matter what the movements of the market. So a future is a contract to buy or sell a fixed quantity of a particular commodity, currency or security (share, bond) for delivery at a fixed date in the future for a fixed price. At the end of a futures contract, the holder is obliged to pay or receive the difference between the price set in the contract and the market price on the expiry date, which can generate massive profits or vast losses.