Melanie Bien: Let child trust funds play the field on investment
Sunday 30 May 2004
The Inland Revenue released more details last week about the child trust funds to be introduced in less than a year.
Changes to the draft regulations include "allowing a wider range of products to enter the CTF market". But is this the case? The Building Societies Association says the decision to allow providers to offer CTFs only if they already sell equity investments eliminates the many building societies which only offer savings products.
The Government argues that as CTF money will be invested for such a long time - 18 years - it should be in equities as these are likely to generate greater returns than savings accounts. And there's enough time to ride out the ups and downs of the market.
But any investment product should involve choice, particularly one that will be available to so many. And while equities do tend to produce greater returns than cash, not everyone will be happy investing in them.
If parents can't afford to contribute to their offspring's fund, is there any point choosing equities? The state's initial contribution - up to £500 - and a further payment when the child is seven will be eaten into by charges if the cash is invested in equities. A savings account paying a good rate of interest, with no charges, may be a more sensible alternative.
In an ideal world, all parents would invest their child's trust fund allowance in a broad range of equities, regularly adding their own money over the years. So by the age of 18, the child would have access to a sizeable sum to pay for university, buy a car or travel round the world.
But not all 18-year-olds will find themselves in this enviable position; to assume they will is shortsighted.
Trouble in store
Store cards are the latest financial product to attract the attention of the Office of Fair Trading (OFT). And with interest rates likely to rise further this year, the OFT's campaign warning consumers to check terms and conditions before they sign up for a store card is timely.
With typical annual percentage rates (APRs) nudging the 30 per cent mark, store cards should not be taken out lightly. Yet that's exactly what tends to happen, primarily because of the way in which they are sold.
We should check the conditions before we sign up for one, just as we should with any other financial product. But if you've ever been offered a store card, you will know just how difficult this can be.
While shopping last week, I was asked whether I wanted to save 10 per cent on my purchase - a common approach from sales assistants flogging store cards. I declined. But if I had accepted and started filling out a form, it is likely that before long I'd have felt harassed, with a queue of 10 people forming behind me during a busy lunch hour.
The last thing you feel like doing in such a situation is quizzing the sales assistant about late-payment charges and whether payment protection insurance is optional. And it is unlikely the sales assistant would be able to give informed answers.
Handled sensibly, a store card isn't necessarily a bad thing. The initial 10 per cent discount could save you a lot if you are making a substantial purchase that day. And you may get perks, such as further discounts or invitations to exclusive events.
But handled sensibly means clearing the balance at the end of the month. If you don't do this, any initial discount will be swallowed up many times over.
The OFT reveals that 30 per cent of adults have a store card, with 60 per cent of these clearing the balance each month. This is the smart way to use a store card. But the other 40 per cent of cardholders are stung by extortionate rates of interest.
Furthermore, 10 per cent don't have any other form of credit. So they aren't taking advantage of 0 per cent introductory rates on credit cards or cheap personal loans. And given that the standard APR on a credit card hovers around the 10 per cent mark, even when the introductory period has ended you won't be fleeced to the extent that you are with a store card.
Clearly, some educational work is long overdue. For more information, get hold of a copy of the OFT's leaflet, "Are you store card smart?", at www.oft.gov.uk.
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