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

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Arts and Entertainment
Buttoned up: Ryan Reynolds with Helen Mirren in ‘Woman in Gold’
filmFor every box-office smash in his Hollywood career, there's always been a misconceived let-down. Now he says it's time for a reboot
News
people
News
Actress Julianne Moore wins the Best Actress in a Leading Role Award for 'Still Alice' during the 87th Annual Academy Awards in Hollywood, California
people
Sport
Ross Barkley
footballPaul Scholes says it's time for the Everton playmaker to step up and seize the England No 10 shirt
News
'We will fix it': mice in the 1970s children’s programme Bagpuss
science
Life and Style
2 Karl Lagerfeld and Choupette
fashion
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
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

    SThree: Graduate Recruitment Resourcer

    £20000 per annum + commission: SThree: Sthree have an exciting opportunity for...

    Recruitment Genius: Telesales Executive - OTE £32,000+

    £18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...

    Ashdown Group: Marketing Manager - B2B, Corporate - City, London

    £45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Neil Pavier: Commercial Analyst

    £50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

    Day In a Page

    War with Isis: Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria's capital

    War with Isis

    Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria
    Scientists develop mechanical spring-loaded leg brace to improve walking

    A spring in your step?

    Scientists develop mechanical leg brace to help take a load off
    Peter Ackroyd on Alfred Hitchcock: How London shaped the director's art and obsessions

    Peter Ackroyd on Alfred Hitchcock

    Ackroyd has devoted his literary career to chronicling the capital and its characters. He tells John Walsh why he chose the master of suspense as his latest subject
    Ryan Reynolds interview: The actor is branching out with Nazi art-theft drama Woman in Gold

    Ryan Reynolds branches out in Woman in Gold

    For every box-office smash in Ryan Reynolds' Hollywood career, there's always been a misconceived let-down. It's time for a rethink and a reboot, the actor tells James Mottram
    Why Robin Williams safeguarded himself against a morbid trend in advertising

    Stars safeguard against morbid advertising

    As film-makers and advertisers make increasing posthumous use of celebrities' images, some stars are finding new ways of ensuring that they rest in peace
    The UK horticulture industry is facing a skills crisis - but Great Dixter aims to change all that

    UK horticulture industry facing skills crisis

    Great Dixter manor house in East Sussex is encouraging people to work in the industry by offering three scholarships a year to students, as well as generous placements
    Hack Circus aims to turn the rule-abiding approach of TED talks on its head

    Hack Circus: Technology, art and learning

    Hack Circus aims to turn the rule-abiding approach of TED talks on its head. Rhodri Marsden meets mistress of ceremonies Leila Johnston
    Sevenoaks is split over much-delayed decision on controversial grammar school annexe

    Sevenoaks split over grammar school annexe

    If Weald of Kent Grammar School is given the go-ahead for an annexe in leafy Sevenoaks, it will be the first selective state school to open in 50 years
    10 best compact cameras

    A look through the lens: 10 best compact cameras

    If your smartphone won’t quite cut it, it’s time to invest in a new portable gadget
    Paul Scholes column: Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now

    Paul Scholes column

    Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now
    Why Michael Carrick is still proving an enigma for England

    Why Carrick is still proving an enigma for England

    Manchester United's talented midfielder has played international football for almost 14 years yet, frustratingly, has won only 32 caps, says Sam Wallace
    Tracey Neville: The netball coach who is just as busy as her brothers, Gary and Phil

    Tracey Neville is just as busy as her brothers, Gary and Phil

    The former player on how she is finding time to coach both Manchester Thunder in the Superleague and England in this year's World Cup
    General Election 2015: The masterminds behind the scenes

    The masterminds behind the election

    How do you get your party leader to embrace a message and then stick to it? By employing these people
    Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

    Machine Gun America

    The amusement park where teenagers go to shoot a huge range of automatic weapons
    The ethics of pet food: Why are we are so selective in how we show animals our love?

    The ethics of pet food

    Why are we are so selective in how we show animals our love?