Cash savings in CTFs suffer interest rate blow
Parents investing their Child Trust Fund (CTF) vouchers in cash accounts have seen interest rates cut by 0.21% over the past year, according to analysis by MoneyExpert.
Although generally savings rates have benefited from the credit crunch, average rates on cash CTFs are currently 6.29% down from 6.5% in June last year.
In addition, the comparison site says the gap between the best-paying and worst-paying CTFs has widened from 2.05% in 2007 to 3.25% today.
Sean Gardner, director at MoneyExpert, says: "The fact that average rates on cash CTFs have fallen in the past year is really disappointing as these accounts are genuinely long-term with children unable to access the cash until they are 18. Firms could afford to offer better deals.”
He recommends parents on lower rates consider switching to a better deal in order to make the most of their CTF voucher. They could also consider moving from a cash account to a stakeholder account or stocks and shares-based investment.
Parents take action
The latest figures from HM Revenue & Customs show that number of parents actively investing their vouchers has improved slightly. The government gives new parents 12 months to decide how to invest their voucher before it automatically opens a stakeholder account on their behalf.
The figures show that in October to December 2006, 70% of parents invested their vouchers. This improved slightly in January to March 2007, to 72%. David White, chief executive of The Children’s Mutual, expects this figure to improve further as more parents become aware of the importance of investing their vouchers.
Miles Bingham, head of savings and investments at CTF provider Family Investments, says improved take-up of the scheme can only be achieved by ditching cash-based accounts and the stocks and shares option, and only offering parents stakeholder CTFs.
"Both the government and providers have been striving to generate greater levels of take-up, but the latest figures demonstrate how challenging it has been to move things in the right direction with current take up running at below the long-term average,” he adds. “Our fundamental belief is that we would like to see take-up at a much higher level, and believe this can only be achieved through a simplification of the whole scheme and by concentrating on providing parents with one clear type of account, the stakeholder version.”
Bingham says this would remove the burden of choice and make the scheme more attractive to busy parents and for those people who struggle to understand the relatively complex options out in front of them.
Research from The Children’s Mutual shows that parents who actively invest their vouchers are more likely to make contributions to the pot in the form of monthly direct debits.
David White warns that if cash accounts were scrapped, contributions to CTFs could be affected. “The more options there are for parents, the more chance they will make the decision to invest the voucher themselves. We don’t offer cash accounts, but I would rather parents put the money into cash and make contributions to it than not at all,” he says.
And Brian Morris, head of savings at the Building Society Association, points out that a large proportion of parents who do decide to directly invest the vouchers opt for cash accounts.
On a more positive note, regular and lump sum contributions to CTFs are continuing to increase in value. The latest quarterly survey by The Tax Incentivised Savings Association (TISA) found that average monthly CTF subscriptions rose to £21.86 per month, up from £21.20 during the same period in 2007, while the average lump sum subscription increased by £84 on last year to £488.
During this quarter, 112,335 new accounts were opened and the number of accounts with active monthly direct debit subscriptions rose by 27,198.
Tony Vine-Lott, director general of TISA, says: “Bearing in mind the financial ‘squeeze’ that is affecting so many families at the moment, the continuing increase in the level of regular savings into a CTF is particularly encouraging."
However, he adds that despite the number of CTFs with a direct debit subscription now exceeding half a million, the majority do not receive any form of top-up.
“I would like to encourage more parents to commit to saving a regular amount into a CTF, obviously at whatever level they can best afford," Vine-lott says. "It’s vitally important that children see the tangible benefits of saving at an early age. It is less how much is saved, more that something is saved, that will teach them a lifelong lesson on how to manage their finances more effectively.”
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.