Child trust stumble parents found their funds but have feet

After an unpromising start, the £250 vouchers are encouraging a new savings habit in Britain

It's the child trust fund's first birthday in 18 days, but the celebrations on 6 April are expected to be muted.

Since that start date, just 64 per cent of the 2.3 million CTF vouchers sent out have been invested - though Treasury officials stress that nearly three-quarters of the vouchers sent in advance of the CTF's launch to families with babies born on or after 1 September 2002 have been opened.

Meanwhile, parents continue to struggle with the decision over where to invest the £250 voucher (£500 for the poorest families), which will grow tax-free. Up to £1,200 a year can be invested on top.

Mistrustful of stock markets and fearful of losing money in an equity-based CTF, many have opted for a safer cash account instead. Yet financial advisers point out that over the CTF's 18-year life, shares will probably ride out the economic ups and downs to outperform returns from a deposit account.

There has been criticism, too, of the fees charged to run "stakeholder" CTFs, which invest in the stock market but switch the money into cash once the child turns 13. Many of these funds simply track an index such as the FTSE 100, but annual fees of up to 1.5 per cent, compared with 0.5 per cent on many regular tracker funds outside the scheme, will eat into returns.

Despite these teething problems, there is evidence that CTFs are helping to kickstart a savings habit among lower-income families. One in four children living in Britain's poorest households have their CTF topped up every month by their parents, according to research by the Children's Mutual friendly society.

Its findings are backed by the Institute for Public Policy Research (IPPR) think-tank, which says genuine signs of a new "savings culture" are emerging in low-income homes.

Those families who earn less than the official "low income" threshold (£13,480) in 2004-05 will qualify for the £500 voucher.

Dominic Maxwell, research fellow at the IPPR, which was instrumental in devising the Government's CTF policy, says: "Of course wealthy parents are saving more, but it's not the case that all those in lower-income households are just putting the voucher in and leaving it."

Mr Maxwell adds that early indications suggest the number of parents saving for their children's futures across all income bands has doubled since the CTF's introduction - a statistic that is supported by David White, chief executive of the Children's Mutual. "Before CTFs, about one in five children had long-term savings plans set up," he says. "It's now at least 40 per cent."

More money is being put aside too. "Parents who had savings plans for their children [with us] before were paying in an average of £16 a month," he adds. "It has now risen to £24."

So much for the raw data. But how have individual families actually been managing their children's accounts? Mr White says parents are increasingly using a range of imaginative tactics to boost the growth potential of their CTFs, which means the investments don't have to rely solely on top-ups from their own pockets.

One recent CTF application was investigated when it arrived accompanied by not one but 30 cheques, he recalls.

"It turned out there had been a baptism ceremony and the parents had asked that any guests who were unsure of what to buy should put something into our CTF instead."

The mutual also received a rash of one-off payments after Christmas, suggesting that the perennial cop-out of relatives unable to think of a suitable present - the cheque - is finally being put to good use.

Anecdotally, many other CTF providers report that direct debits and standing orders are being set up across all income bands.

Of the 90,000 equity-based CTFs managed by Nationwide building society, a third are topped up regularly, it says.

Nationwide's latest Children's Savings Report suggests that equity-based CTF accounts supplemented by the maximum £1,200 annual contribution could be worth £40,000 in 18 years' time, assuming growth of 7 per cent a year and 1.5 per cent charges.

Children's charities welcome the findings of the Children's Mutual, albeit with reservations. "Three years ago, people were saying 'nobody's going to save' [with the trust fund], so it's very exciting," says Natalie Cronin, the NSPCC's head of policy and public affairs.

"But [we] still [have] concerns about the relatively low take-up, and this points to additional work that the Government needs to do on financial literacy."

However, Ivan Lewis, the Economic Secretary to the Treasury, believes low-income families are getting their heads around the CTF.

"The fund is about changing the culture around saving - getting people to think differently about their children's futures, to have aspirations for them," he says.

"If the early indications coming from providers prove correct, [we'll be] very pleased."

'It should be a tidy sum'

A new savings habit is slowly being formed with a new family.

Ben Benatt, 39, and Jo Noble, 34, from east Sussex have a combined income of £28,000. They have been making regular payments into a Nationwide savings account for their son, Harvey, two.

"We took out a fund for Harvey when he was born, and are paying his child benefit straight into that - it should be a tidy sum now," says Ben, a self-employed ecologist who does consultancy work for developers and local authorities.

He and his wife have yet to start making regular top-ups to Harvey's CTF - an ethical cash deposit fund with the Co-operative Bank - but they plan to do so shortly.

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