Children's future still looks bright
It's the end of the line for child trust funds, but parents should consider other savings options. Alison Shepherd reports
Sunday 30 May 2010
The coalition Government's decision to withdraw child trust funds (CTFs) this year to save taxpayers £520m may seem a huge blow to parents, but the message from the experts is: don't be too downhearted, as there are still plenty of savings options out there for children.
The key factors, according to the experts, when deciding where to place your money are: how long the investment can run; whether you want to access the pot before term; and in whose name you want the savings to be, the adult's or the child's. Then there is the matter of how much risk you want to take and how much of your money will be eaten up by fees and charges.
James Norton, director of the independent financial adviser Evolve, says CTFs will be missed because they helped make savings decisions easier. "The importance of the funds was that they were really simple to understand. Tax was just not an issue and that made it easy for parents to save." For similar no-hassle products, he recommends tax-free Children's Bonus Bonds from National Savings & Investments or its index-linked savings certificates. He also suggests bare trusts, which can be set up by a parent or grandparent in the name of the young trustee, who at the age of 18 can immediately, and independently, call on the assets.
This right of 18-year-olds to do as they please with the money was one negative aspect of CTFs for some parents. As Simon Ainley, a partner at the IFA Holland Hahn & Wills, explains: "There is a school of thought that an 18-year-old and a sudden, large amount of cash is not necessarily a good mix."
To safeguard against this, many parents prefer to choose a product in their name that allows them to decide when to pass it on to their child.
Possibly the easiest option is for parents to ensure that they use up all their tax-free allowance available on individual savings accounts (ISAs) – for share-based accounts, now £10,200.
Investing in unit or investment trusts can be a good way to get exposure to the stock market without taking the risk of ploughing large amounts of cash into single company shares. These are pooled funds of investors' money, invested in a portfolio of shares and securities, and managed by a professional fund manager. They allow individuals with relatively small amounts of money to gain exposure to a diversified portfolio. But Mr Norton warns: "These are complex schemes. Parents should seek advice before investing in them."
Some providers, however, make things very simple. The Scottish Investment Trust offers its Stockplan: A Flying Start scheme that allows parents to pay in as little as £25 a month, which then gets invested in the stock market. Drip-feeding cash into a fund in this way has the key advantage of ironing out the peaks and troughs of market conditions. In addition, unit or investment trusts often have a lower annual management charge than a CTF, currently capped at 1.5 per cent a year.
Time is also important when deciding on a product, says Mr Ainley: "It is plain common sense – risk and returns go hand in hand. But the pivotal point is five years; if you have that long, then index-tracking equity funds are best. For less time, you should be looking for cash-based investments."
For those who take out a product for a newborn and have 18 years to save, Mr Ainley recommends that they should follow the CTFs' lead and look for a phased switch from equities to cash as the child reaches the age of 13, as short-term share-based returns are not reliable.
Tax, of course, can be an issue. If investments grow substantially, they may attract capital gains tax when the time comes to sell shares or an asset. However, again money invested through an ISA is free of CGT and investments held in an adult's name will enjoy an annual allowance of £10,100, although this may be lowered in the emergency Budget on 22 June.
As for income tax, again if the child's cash is held in an adult's name, using an ISA will prevent a tax grab. Separately, Mr Norton reminds parents that savings in a child's name can earn up to £100 interest a year before it becomes liable for income tax.
Parents are also advised not to ignore the traditional children's savings accounts available from high street banks or building societies, which have not disappeared – although thankfully, most have lost their gimmicky marketing ploys. Paul Lawler, of moneysupermarket.com, says there are some great rates to be had: "Children's rates still seem to be pretty high. Bath Building Society, for example, is offering 5 per cent on its Future Builder account."
The wind-down of CTFs begins in August when the Treasury's contribution to newborns will be reduced to £50 from £250 for better-off families; and from £500 to £100 for lower-income families. It will also stop paying the top-ups to seven-year-olds. From next January, no vouchers will be issued at all. But that does not mean an end to existing funds.
As David White, chief executive of The Children's Mutual, the specialist provider of long-term savings products for families, says: "This is not the end of child trust funds. Families who already have a fund will be able to maintain them until their child is 18, and those who have, or are expecting, a child this year will be able to set one up."
Mr White is disappointed that the "most successful savings scheme ever" is coming to an end, but says: "The challenge now is to work out how we can fill the gap when January comes around."
The Children's Mutual and other providers, including Family Investments, will continue to market CTFs right to the bitter end, but have already started negotiations with the Government on the next generation of products that they hope will continue to build on the "very, very important" savings culture that CTFs inspired.
"CTFs are very popular and encouraged parents to save in other ways, particularly if they had children too old to qualify," says Kate Moore, Family Investment's head of savings and investments. "We will be looking to persuade the Government that even if it cannot afford vouchers any more, it could keep CTFs' unique £1,200 tax-free advantage in a new product.
"As the leading provider of children's products we have spent a lot of time talking to our clients, and what we aim to do is create a product that takes all the best bits of CTFs, but takes away the bits that weren't so popular, such as access at 18 and no access in an emergency."
Everyone agrees that whatever the future of CTFs or any successor, parents and grandparents will not stop saving for the younger generations.
"The Government may have decided it can't afford to save for children, but parents have not," says Mr White. "Young adults will still face the same problems of trying to get on the housing ladder, or face the millstone of debt when they graduate. These will still be there."
Kate Moore, Family Investments
"It is a basic need for parents to protect and provide for their children. But in that first year of their baby's life, parents have so many other things that they have to deal with: they're usually very tired and busy, and they often don't have much money because their income can halve.
"Child trust funds (CTFs) gave them one fewer thing to have to think about. CTFs gave them something of real value and, in addition, helped to engage them in savings for their children."
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