Inflation hits kids' cash savings
Children’s savings are being eroded because Child Trust Fund (CTF) vouchers fail to keep up with inflation, parents have been warned.
The government has been running the CTF initiative for three and a half years. All babies born between 1 September 2002 and 5 April 2005 are eligible for a lump sum of £256 from the government while those born after 5 April 2005 have or will receive a voucher for £250, which must be invested in either a cash or equity-based CTF. The account is later topped up by the government when the child turns seven.
However, CTF provider, The Share Centre, says the government needs to do more to ensure that children’s money is protected from inflation.
Guy Knight, a director at The Share Centre, says that children born today will receive £145 less after inflation (2.7%) than their predecessors during the course of the scheme.
“Vouchers for babies born in 2008 need to be for £288 to have the same buying power that children born in 2002 received,” he adds. “And this difference is only going to get worse over time as inflation eats into the value of vouchers. The CTF scheme is very valuable for children but the government shouldn’t penny pinch by failing to increase vouchers with inflation.”
The Share Centre calculates that over 18 years (the age when children are able to access their money), inflation could leave CTFs with a shortfall of £97 million a year, assuming six million births a year and inflation of 2.7%.
Knight says: “We would urge the government to reconsider the limits and keep them in line with inflation so that every child has a fair and equal starting point for their investments.”
It also wants parents to put pressure on the government, and has set up a petition calling for inflation-linked CTF vouchers. You can sign the petition here.
So how would inflation-linked CTFs work? Knight explains that it would be too complicated for the government to alter CTF vouchers every time inflation moves. Instead, he foresees a review on a quarterly or annual basis.
However, despite the compelling argument for inflation-linked CTFs, not everyone is convinced the government will take up the call.
Tony Anderson, marketing director of CTF provider The Children’s Mutual, says he would welcome the government providing more money upfront to children. But he warns that, with the credit crunch continuing to rage, increasing payments is probably not at the top of Gordon Brown’s to-do list.
“It makes sense to link CTF vouchers to inflation, but there have never been so many calls on the public purse as there are now so we shouldn’t assume it will happen anytime soon.
“Instead, parents, relatives and family friends should take responsibility to ensure children turn 18 with a decent savings vehicle in place.
“Contributions to a CTF (up to £1,200 a year) can be made by anyone, and we are already seeing an increase in contributions from extended families, with 20% of ad hoc payments from grandparents for example.”
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).