It's the old story: new baby bonds benefit the better-off

Only families who can afford the extra £1,000 a year gain the most, warns Katherine Griffiths

The Government this week unveiled details of its long-awaited saving scheme for children, promising to hand over at least £250 to all parents who have had a baby since 31 August last year.

The Government this week unveiled details of its long-awaited saving scheme for children, promising to hand over at least £250 to all parents who have had a baby since 31 August last year.

Couples and single parents will not be able to use the cash themselves, but will have to take out a so-called child trust fund which will be on the shelves of unit trust companies, banks and insurers probably from the end of next year. The delay by the Government announcing them last week to the trusts being available will mean the trusts can be back-dated to children born on or after 1 September, 2002.

Families will not be obliged to add any of their own cash to the savings scheme, but the idea is to encourage parents, other family members and friends to top up the trust fund with regular contributions. These must be left, hopefully to accumulate by being invested in the stock market, and will be accessible to the children only on their 18th birthdays.

Gordon Brown, despite being famed for his prudence, said in Wednesday's Budget, then they can use the money any way they want. But the Government's idea is for them to have enough of a nest egg to help pay university fees, a deposit on a first home or even their wedding. But will the child trust fund really have an impact on tomorrow's generation, or is it just another gimmick dreamed up by this Government to justify political decisions such as stopping free university education?

The child trust fund looks as though it will indeed be very effective for some families, those who can afford top-up contributions. The Chancellor said families and friends would be able to contribute up to £1,000 a year to the fund. More details will emerge in the summer, but it is likely that these contributions will have tax advantages and any growth will be lightly taxed or not taxed.

At present, growth from gifts of money from parents to children is taxed at the parent's tax rate if the income exceeds the child's personal allowance of £4,615. Mr Brown, one of the most ardent campaigners in the Government against child poverty, has said the new child trust fund will help the less well-off most. Most parents will receive £250 when their baby is born, but the bottom one-third of the 700,000 babies born every year will be entitled to £500.

The Government is planning to top up its contributions when children reach five, 11 and 16. Most observers think it will add £50 to £100, depending on parents' salary, at each stage.

But critics of the new child trust funds say that unless you can afford to contribute close to the full £1,000 a year, the trust funds will be of little use, making it a rerun of the experience with of stakeholder pensions.

The pensions, which were launched in 2001, were another initiative aimed primarily at low earners. In fact, richer individuals have been stakeholders' greatest fans because they are a tax-efficient way for partners to save on behalf of non-earning spouses and for well-off parents to save for children.

Those making the largest contributions into the new child trust funds will have the most choice about how their money is invested and will be able to put the money in stocks and shares because the size of their funds will make it cost-effective for companies to manage the money. Conversely, those who add almost nothing to the Government's contributions will not have much choice and will probably have to opt for a trust which is effectively a bank deposit account. That would not create a very big pot after 18 years.

The Government's £250 put in the bank would be worth only £299 in today's money in 18 years, based on today's inflation and interest rates. Even growing at 4 per cent a year, by 18 the £250 turns into £506.

But David White, chief executive of The Children's Mutual friendly society, says parents don't actually have to contribute that much to see their investment grow. On historic growth rates, a family getting the full £500, the same group getting the new child tax credit, could see their pot grow to £17,000 in 18 years if they contribute the credit to the fund each month. On average, the credit is worth £45 a month, and is paid to all families with an income below £58,000 a year.

This pot would be enough to pay for a deposit, estimated to be at an average of £12,000 for first-time buyers in 18 years or help with university fees, estimated to be £35,000 then. Even on contributions of £25 or £50 a month, companies ought to be able to invest the money in the stock market, Mr White says. The Children's Mutual already does this with contributions of that size into its Baby Bond and Childrens' Portfolios products.

The Baby Bond and similar products available at other friendly societies are the only products on the market offering a tax break for parents wanting to save specifically for their children. The drawback is that the cap on tax-free contributions is only £25 a month.

Childrens' Portfolios are marketed to concerned parents, but they are actually only a marketing wrapper around products such as individual savings accounts and with-profits contracts which allow families to contribute more for their children, £7,000 a year tax-free for equity Isas. The portfolios can be invested in equities initially and are gradually shifted into fixed-income products as children approach 18. The incoming child trust fund will have a smaller contributions cap, but the regulations will make it easier for companies to administer, probably keeping the costs low for consumers.

Mr White added: "We know in many cases people who couldn't afford to save for themselves want to save for their children to help them as much as possible. This will give them a good head start."

Case study: But what about the other siblings?

Richard and Nicky Kelsall are looking forward to setting up a child trust fund for their daughter, Holly, born on 3 March. But Gordon Brown has also given them a problem: they have two more children, Charlotte, four, and Ben, two, now too old to qualify for the new savings account.

Mr Kelsall, who works in the York office of Norwich Union in North Yorkshire, says: "If the Government is going to put a minimum of £250 in and add interest to it tax-free, that's an easy decision to make. But we'll have to do something for Charlotte and Ben or they'll feel they've missed out."

It's a problem many families will suffer. But the Kelsalls want to see more detail before they decide whether to contribute the £1,000 a year top-up. "Will it just go into a deposit account, or can we go into with-profits or the full range of investment funds?" Mr Kelsall asks. "And management charges can eat up a lot of the interest."

The Children's Mutual: 0500 800 830 or www.thechildrensmutual.co.uk