The death of the CTF – what's next?
The new government promised a tough stance on tackling the country's finances, so it was hardly surprising when it revealed the child trust fund (CTF) was getting the axe.
CTF vouchers were introduced in 2005 (and backdated for children born on or after 1 September 2002). All new parents were given a £250 voucher by the government to put into a CTF, with lower-income families receiving £500. Additional payments, of the same amount, were then given to children at the age of seven.
However, from August 2010 secondary payments have been stopped, while initial payments are reduced to £50 and the vouchers for children born into lower-income families to £100.
In January 2011, the vouchers will be scrapped altogether, in a move that will save the government £320 million this year and £520 million in 2011/12.
So what does this mean for your child? Here we answer your most common questions.
Q: I've already got a CTF in place for my child, will I have to shut it down?
The simple answer is no. Existing holders of CTFs will still be able to top up funds with up to £1,200 a year and the funds will continue to benefit from tax-free investment growth. The facility to change the type of account and/or move it to another provider will also remain.
"If you have a CTF, it will remain open and while the government won't be paying any more money into it, you can choose to pay money into it yourself," explains George Ladds, head of investment and pension research at Fair Investment.
Q: I'm due to give birth in December, will I still be able to open an account?
Yes. Any unused vouchers can be redeemed up to their expiry date, and if parents fail to use them, HM Revenue & Customs will open a default account on the child's behalf.
Unfortunately, you will only get the reduced amount of £50, or £100 if you're on a lower income – and you won't receive the second top-up payment when your child reaches seven. However, any interest rate accrued or investment growth will be shielded from the taxman.
Q: What other options are there?
There are still several options if you would like to save or invest for your child. In fact, the CTF might not have been the best option in the first place.
For example, the £1,200 annual limit means that you can't save more than £100 a month, and it can also be tricky if you have one child who is eligible and another who isn't.
Ladds says: "By introducing the CTF, one child might have £500 and you have to make up the difference for the one who hasn't. You don't really have a choice as to when or for whom you can invest the money, which isn't ideal."
Other options include savings accounts and children's investment plans. Jason Hollands, spokesperson for F&C Investments, explains: "While children cannot be direct holders of investments, parents can buy them and hold them on behalf of their child, or use a trust."
Q: OK, but is there any other way I could save tax-efficiently for my child?
Savings held under a child's name are tax-efficient as children have an annual tax-free allowance just like adults – the current threshold for capital gains tax is £10,100 and for income tax is £6,475 (this goes up to £7,475 from April 2011).
The government's NS&I products are tax-free, but you should be aware that index-linked savings certificates have been withdrawn by the NS&I now.
Another alternative if you want to save tax-efficiently for your child is to set up a pension. Hollands says: "A stakeholder pension is a very long-haul way of saving for children as there's no access to the money until the child reaches the age of 55.
"It shouldn't be a first saving priority, but if you have a large amount of money, it can be an attractive way of saving for the future."
You can put up to £3,600 away in a pension pot on behalf of a child each year.
Q: What about ISAs for children: do they exist?
When your child reaches 16 the're allowed to take out a cash individual savings account where they can put up to £5,100 each year. Some industry experts are campaigning for the introduction of kids' ISAs.
"We need one simple system – having a children's ISA would solve that," says Ladds. But, with the government scrapping the CTF, it's unlikely to introduce ISAs for younger children.
One option is to put the money saved for your child into your own ISA – if you haven't used your full allowance.
Will scrapping CTFs have a major impact on the next generation of children?
NO says: Danny Cox, head of advice at Hargreaves Lansdown
CTFs are a decent idea in principal but ineffective in practice. The core of the CTF's aims is to provide the stimulus for the child's financial education and saving.
But 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.
Handing out £250 at birth, followed by £250 at seven, is also 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 that the range of products available is small, and those who need help the most cannot get advice. This is probably one of the reasons why an estimated 25% of the vouchers issued have not resulted in a proactive investment decision.
Once the voucher is invested, there are many 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 costs are similar and in some cases lower, and, if set up in the right way, the results are as tax-efficient.
The age of receipt is also an issue for some. Legal responsibility is achieved at 18, but most would agree that this isn't the age of financial maturity.
It calls into question what the CTF money will be spent on. In fact, the average 18-year-old will probably spend their money on late nights, takeaways and the latest mobile phone.
CTFs are ineffective for the taxpayer, and the government, sensing this, has announced a cessation of the scheme.
YES says: Kate Moore, head of savings and investments at Family Investments
The CTF is the most successful government saving scheme ever. All children receive a voucher and 74% of eligible parents open an account during their child's first year.
This compares to only 29% of eligible adults who open an individual savings account, and 40% of people who have a pension. With average CTF top-ups of £289 a year, parents are demonstrating their desire to save for their children.
One of the original objectives of the CTF was to underpin a savings culture in a debt-ridden society. This objective has clearly been achieved, with 12 million adults involved in 5.2 million open CTF accounts, covering families from all parts of the country and all walks of life.
The simple fact is that, due to the past success of the CTF scheme, more children than ever will be starting their adult life with a financial asset.
When the first CTFs begin to mature in 2020, an estimated £2.5 billion will start moving into the economy each year as young people begin putting their asset to use.
The current alternatives to the CTF are complex and require specialist advice. Consequently, when the CTF scheme ends in January 2011, many well-meaning parents will put off the decision to save altogether.
The government must deliver on its promise to facilitate a savings culture while not overlooking the positive impact of providing every young adult with a financial asset to improve their situation and prospects. The gap left by the government-funded CTF will need to be filled.
We're working with Save Child Savings alliance to keep the CTF structure; even without the government top-ups, the benefits of maintaining a tax-efficient product for families to save into should not be underestimated.
For more, watch Moneywise TV on investing for children at moneywise.co.uk/investing-kids/tv
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.