Child trust funds had value beyond pounds and pence

IN THE months before the election George Osborne, now Chancellor, was increasingly vocal in claiming his economic policies would restore "a savings culture to the heart of the economy".

Scrapping child trust funds (CTFs) suggests he has either changed his mind or has no interest in promoting long-term savings in the UK.

CTFs, under which all children get 250 at birth (500 in low income families) to be held in an account until they turn 18, were an easy target for spending cuts, but abolishing them entirely will prove a short-sighted and wrong-headed decision.

On the economic face of it, scrapping CTFs makes sense. The necessity of tough decisions in the face of the deficit is the biggest argument for getting rid of CTFs, although families continuing to contribute will still benefit from tax relief. There are clear drawbacks to CTFs – their complexity has deterred many parents from actively investing them, while the fact that the money goes straight to the child at 18 was a definite flaw.

There was also a strong argument for means testing CTFs to ensure they were targeted at families needing help saving for their children rather than those already saving for their kids. However, the universality of CTFs was an key part of its aim of encouraging a greater savings culture, because the idea that middle class families will save for their children anyway is not supported by the evidence of recent years. CTFs have succeeded in increasing parental savings for children across the social spectrum, an achievement that could have formed the basis of a revival of the savings habit. Instead, cutting the cost of CTFs by reducing the amount given out and removing the top-up at age seven would have produced significant savings without compromising the long-term impact of the scheme.

But for every valid objection to CTFs there is a powerful counter-argument. Consider the impact of unemployment, reduced benefits and decimated savings on many low income families over the next decade. According to The Children's Mutual, 30 per cent of households with an income of 19,000 or less typically save an additional 19 a month for their child in CTFs. Their biggest chance of giving their children some economic foundation from which to embark on their adult lives has now been snatched away.

Nor should the power of CTFs as a tool for encouraging savings and improving financial literacy be underestimated. Critics point out that only 71 per cent of eligible children have had a CTF account opened for them (although research suggests some parents consciously decide to let the government open it for them). But compare that to other tax-favoured investments. Currently around 27 billion is spent on pension tax relief – yet just 40 per cent of people are in a pension. Another billion is spent on Isas, which have take-up of less than a third.

The value of CTFs will become clearer in 2020, when the first account holders can access their funds. Of course not all the money will be spent wisely but the fact is that, eventually, under CTFs every child in the UK would own a financial product. Used in conjunction with financial education CTFs can be an invaluable bridge between theory and practice for children that would otherwise have no experience of financial products. CTFs have reached areas other savings initiatives couldn't and that fact, more than any other, made them worth retaining in some form. Several economists have spoken out in favour of the long-term impact of CTFs on reducing personal debt and improving financial literacy. Julian Le Grand, professor of social policy at the London School of Economics and a former government adviser, believes the accounts encourage people to invest, save and to "think about the future more widely".

Those complaining that CTF take-up has been low and that the values may not amount to much miss the point entirely. Millions of children will be given a practical lesson at 18 in the value of savings and a positive experience of financial services. The loss of a scheme with the potential to significantly bolster the UK's long-term savings culture is a mistake.