Call to make Child Trust Funds cheaper

THE government has been urged to reconsider plans to scrap Child Trust Funds and instead to reform them so they are cheaper to run.

In the Coalition Agreement published last week the government said it planned to "reduce spending on Child Trust Funds", prompting speculation that they will be scrapped for families who are not on low incomes.

But think tank the Social Market Foundation (SMF) said limiting the funds to the less well-off may make them less viable as the annual management charges would be loaded on to those who saved the least.

Instead, it said, there were a number of measures that could cut the cost of the scheme dramatically while other changes could be introduced to offer greater saving incentives to people on low incomes .

All children born on or after 1 September 2002 currently receive a 250 child trust fund (CTF) voucher to be invested on their behalf, with children from less well-off families receiving 500.

The government makes a further contribution when children are seven and family and friends can pay in up to 1,200 a year.

But the SMF said abolishing the universal payment for seven-year-olds would save 218.5 million a year.

The report also suggested reducing the value of the voucher that all children receive at birth from 250 to 50, with children from less well-off homes receiving one worth 200, saving a further 153m annually.

And a further 181.4m a year could be saved by ending tax relief on children's savings accounts that were not CTFs. The group also suggested a series of measures to help encourage people on low incomes to save for their children.

It said the government should match any contributions made by low income families into a CTF up to 50 a year for the first five years of a child's life, which would cost around 165m a year.

Overall, SMF estimates that its proposals would reduce the cost of offering CTFs to around 150m a year.

Ian Mulheirn, director of the SMF, said: "Government has to reduce spending. Our proposals allow Child Trust Funds to continue, to work better and for costs to be reduced by two-thirds.

"Limiting CTFs to the least well-off may render them financially unviable. Keeping tax relief on other children's savings whilst drastically cutting the CTF scheme only benefits children from better-off families at the expense of the rest."

Figures from HM Revenue & Customs last year revealed that a quarter of new parents (nearly one million households) failed to open a CTF in the first four years after their launch. Many new parents put CTFs at the bottom of their "to do" lists, while many stockmarket-invested funds failed to match even the miserably low rates of interest on savings-account based CTFs.