A gift that will grow up with your kids

Budget 2003: Families have benefited from Gordon Brown's generosity, but many taxpayers are counting the cost
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The Independent Online

Most new parents intend to save for their children's future, but statistics show that four out of five don't get round to it. So it is hoped the Chancellor's announcement that every baby born since last September is to receive a child's trust fund will act as a catalyst and encourage more parents to save.

Most new parents intend to save for their children's future, but statistics show that four out of five don't get round to it. So it is hoped the Chancellor's announcement that every baby born since last September is to receive a child's trust fund will act as a catalyst and encourage more parents to save.

Although the exact details of the trust funds aren't due to be announ- ced until July, what is known is that the Government will invest at least £250 for every newborn child. Those from the poorest families will receive an initial investment of £500. The Government will top up the fund, adding something like £50 to £100, when the child reaches the ages of five, 11 and 16.

Parents and grandparents will be encouraged to add to the funds themselves; they will be able to make additional contributions capped at £1,000 a year. There are also likely to be tax advantages in saving for your child this way – the contributions will probably be either tax free or only lightly taxed. The money will be invested until the child is 18, when he or she will have access to it.

"Being a parent is a balancing act between the present day and the future," says David White, chief executive of friendly society The Children's Mutual, who has attended most of the workshops organised by the Government to promote the trust funds. "Saving for children is different from any other form of saving, as the whole fam- ily often wants to get involved. One of the main advantages of a child trust fund is that it's a nice central pot, with that little person's name on it, which anyone in the family can contribute to. So it'll be much easier to save than it is at the moment."

Gordon Brown has yet to announce the savings vehicles into which this money will be invested. Parents are likely to have a range of options, some of which will be equity linked as this offers the greatest scope for growth.

"We've already seen an increase in demand for children's investment schemes as people become more aware of the rising costs of education and getting on the property ladder," says Ian Over- gage, head of investment trust marketing at Gartmore. "The child trust fund will introduce new investors to the concept, instead of just keeping their cash in a bank or building society account."

Over the long term, the difference between the returns generated from equity-linked investments and those from deposit accounts is significant. "If the state endowment of £250, proposed for all children, had been invested in the Foreign & Colonial Investment Trust 18 years ago, it would be worth £1,386 today," says Georgette Harrison, director at F&C Management. "In comparison, the equivalent amount put into a building society would now be just £729. The difference of 46 per cent is quite striking. Additional government and family contributions will provide even more potential to build a fund to give young people from all backgrounds a better start to their adult life."

While you may think that £1,386 isn't going to do much to ease the financial burden of university costs, Mr White at The Children's Mutual points out that most of the kids who receive only the basic £250 are likely to have parents or grandparents who will put more away for them.

Those from poorer families will receive more from the Government, says Mr White, and, anyway, not everyone will want to go to university.

"There's enormous focus on university but people from all walks of life want the best start in life for their children," says Mr White. This money could be used for further education, but it could equally be used to pay for driving lessons, to set up a business or even to buy suits for work.

While only children born since last September will receive the new state contributions, it is hoped that parents will be able to set up funds for children born before then and benefit from the £1,000 annual allowance to help them save tax-efficiently.

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