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

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."

Expert View

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."

Suggested Topics
News
Pro-Russia rebels guard a train containing the bodies of victims of the Malaysia Airlines flight MH 17 crash in Torez, Ukraine
i100
Life and Style
Child's play: letting young people roam outdoors directly contradicts the current climate
lifeHow much independence should children have?
Arts and Entertainment
Tycoons' text: Warren Buffett and Bill Gates both cite John Brookes' 'Business Adventures' as their favourite book
booksFind out why America's richest men are reading John Brookes
Property
Sign here, please: Magna Carta Island
propertyYours for a cool £4m
PROMOTED VIDEO
Arts and Entertainment
Struggling actors who scrape a living working in repertory theatres should get paid a 'living wage', Sir Ian McKellen has claimed
theatre
News
Skye McCole Bartusiak's mother said she didn't use drink or drugs
peopleActress was known for role in Mel Gibson film The Patriot
News
i100
Arts and Entertainment
Damon Albarn is starting work on a new West End musical
artsStar's 'leftfield experimental opera' is turning mainstream
Life and Style
Paul and his father
artsPaul Carter wants to play his own father in the film of his memoirs
Sport
Ben Stokes trudges off after his latest batting failure for England as Ishant Sharma celebrates one of his seven wickets
cricket
Arts and Entertainment
Members of the public are invited to submit their 'sexcapades' to Russell T Davies' new series Tofu
tv
News
Sky's Colin Brazier rummages through an MH17 victim's belongings live on air
i100
Arts and Entertainment
Keira Knightley and Benedict Cumberbatch star in the Alan Turing biopic The Imitation Game
arts + ents'The Imitation Game' stars Benedict Cumberbatch and Keira Knightley
Extras
indybest
News
i100... and no one notices
Arts and Entertainment
Friends reunited: Julian Ovenden, Richard Cant and Matt Bardock in rehearsals for the Donmar revival of 'My Night
with Reg'
theatrePoignancy of Kevin Elyot's play being revived just after his death
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Business Analyst (Systems/ Incident Analyst)

    £40000 - £50000 Per Annum: Clearwater People Solutions Ltd: Business Analyst r...

    BA/PM - Client Data

    £500 - £550 per day: Orgtel: BA/PM - Client Data London (Greater)

    6449646 - SQL Developer - Ldn - £450pd

    £400 - £450 per day: Orgtel: SQL Developer - Banking - London - £450pd Our cl...

    SQL DBA - Banking - Gloucester - £400pd

    £375 - £400 per day: Orgtel: SQL DBA - Banking - Gloucester - £400pd Our clie...

    Day In a Page

    Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

    The 'scroungers’ fight back

    The welfare claimants battling to alter stereotypes
    Amazing video shows Nasa 'flame extinguishment experiment' in action

    Fireballs in space

    Amazing video shows Nasa's 'flame extinguishment experiment' in action
    A Bible for billionaires

    A Bible for billionaires

    Find out why America's richest men are reading John Brookes
    Paranoid parenting is on the rise - and our children are suffering because of it

    Paranoid parenting is on the rise

    And our children are suffering because of it
    For sale: Island where the Magna Carta was sealed

    Magna Carta Island goes on sale

    Yours for a cool £4m
    Phone hacking scandal special report: The slide into crime at the 'News of the World'

    The hacker's tale: the slide into crime at the 'News of the World'

    Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
    We flinch, but there are degrees of paedophilia

    We flinch, but there are degrees of paedophilia

    Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
    The truth about conspiracy theories is that some require considering

    The truth about conspiracy theories is that some require considering

    For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn
    Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

    Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

    Meet the man who doesn't want to go down in history as the country's last Scottish Secretary
    Legoland Windsor's master model-makers reveal the tricks of their trade (including how to stop the kids wrecking your Eiffel Tower)

    Meet the people who play with Lego for a living

    They are the master builders: Lego's crack team of model-makers, who have just glued down the last of 650,000 bricks as they recreate Paris in Windsor. Susie Mesure goes behind the scenes
    The 20 best days out for the summer holidays: From Spitfires to summer ferry sailings

    20 best days out for the summer holidays

    From summer ferry sailings in Tyne and Wear and adventure days at Bear Grylls Survival Academy to Spitfires at the Imperial War Museum Duxford and bog-snorkelling at the World Alternative Games...
    Open-air theatres: If all the world is a stage, then everyone gets in on the act

    All the wood’s a stage

    Open-air productions are the cue for better box-office receipts, new audiences, more interesting artistic challenges – and a picnic
    Rand Paul is a Republican with an eye on the world

    Rupert Cornwell: A Republican with an eye on the world

    Rand Paul is laying out his presidential stall by taking on his party's disastrous record on foreign policy
    Self-preservation society: Pickles are moving from the side of your plate to become the star dish

    Self-preservation society

    Pickles are moving from the side of your plate to become the star dish
    Generation gap opens a career sinkhole

    Britons live ever longer, but still society persists in glorifying youth

    We are living longer but considered 'past it' younger, the reshuffle suggests. There may be trouble ahead, says DJ Taylor