Child trust fund (CTF) vouchers will be scaled down from August and scrapped altogether from January 2011, under new spending cuts announced by Chancellor George Osborne.
While, CTFs will still exist as a tax-free savings and investment vehicle, families will no longer benefit from government contributions.
Currently, parents receive £250 for every newborn child and another £250 when the child turns seven. From August, initial payments will drop to £50 and the secondary payment will be scrapped.
For babies born into lower income families, initial payments of £500 will drop to £100 after 1 August. Children currently get this if their household income is less than £16,190.
Additional payments of £100-£200 made to families with children eligible for disability allowance will continue for this year, but will also wind up at the start of 2011. This money will be channelled towards providing more respite care for the children.
In a bid to tackle the monstrous budget deficit inherited from the last government, Osborne announced over £6 billion worth of cuts to be made this year. The cuts to CTF contributions will save £320 million this year and £520 million in 2011-12.
Chief secretary to the Treasury David Laws admits the move will come as a “disappointment to some parents”, but adds that to continue such a policy would be dishonest, since future generations would end up footing the bill if the deficit was not tackled now.
Existing holders of CTFs will still be able to top up funds with up to £1,200 a year, but without the added incentive of cash from the government they might be better off looking into alternative savings and investment routes.
George Ladds, head of investment and pensions research at financial provider Fair Investment Company, backs the decision to scrap CTFs:
“I have always found them to be an odd concept. The assumption that as parents we are incapable of saving for our children without funding from the state is slightly insulting.
“Those who can afford to save will, and shouldn’t be getting hand outs to do so, while those who can’t afford it have much bigger things to worry about, like paying bills. This is money they could do with now, not in 18 years time,” he says.
Justin Modray, former IFA and founder of candidmoney.com, thinks the government’s move is disappointing. He calculates children born on or after 1 January 2011 will miss out on £1,200 by not getting any contribution from the government.
This is what the £250 government vouchers at birth and age seven would otherwise have been worth when they reach age 18, assuming 6% annual growth after charges.
David White, chief executive of Children’s Mutual, has urged families to continue saving for their children into CTFs, as a tax-free investment vehicle.
He says: “We are staggered by George Osborne’s announcement today. The CTF is the single most important savings policy to date and this sort of short-term cut does not address the pressing need for families to save.”
Currently 1.4 million parents, family and friends contribute to CTFs with over £22 million added each month.