Sam Dunn: A bucket of cold water over child trust funds
Sunday 19 December 2004
Hold on tight: the imminent birth of child trust funds will involve some painful labour.
Chancellor Gordon Brown's flagship savings scheme to give every baby delivered on or after 1 September 2002 at least £250 for investment until their 18th birthday goes live in April.
Yet parents soon to be sent the savings vouchers (£500 for the poorest families, earning less than £13,480) face a horribly thin list of companies to which the money can be safely entrusted.
The fund manager Fidelity last week abandoned its plans to launch a child trust fund after its research suggested a lack of demand for what it could offer.
Other big companies, such as the insurers Legal & General and Prudential, had already snubbed the scheme, but Fidelity's announcement was a particular blow since it was one of the most dynamic investment firms to have expressed an interest. Most others committed to providing the funds are banks, life companies and building societies. Among these are Barclays, Liverpool Victoria and Norwich Union.
This general unwillingness to participate is down to money - or rather, the great difficulty in making any.
Dominic Cummings of the independent financial adviser Bestinvest says companies once excited about the plans now simply scratch their heads and wonder if they will work.
An official list of companies prepared to provide the funds has still to be drawn up by the Inland Revenue, and the clock is ticking loudly. Next month, this roll-call of approved firms has to be sent to parents before they receive the vouchers weeks later.
These can be placed either in a cash deposit account or an alternative "stakeholder" fund that will include stock market investment early in your child's life before being switched to less risky assets, such as bonds and cash, three or four years before the fund matures when the child turns 18.
Companies that offer the "stakeholder" option have to cap charges at 1.5 per cent.
A third non-stakeholder fund option carries higher charges but aims for greater growth through riskier stock market investments.
Deciding which of these three options to go for won't be easy for many parents. I fear they will simply take the easy option and dump the money in a basic deposit account. Research from Barclays last month suggested that many low-income parents would open their child trust fund account with a provider they have already dealt with.
But a £250 sum, topped up by a second £250 payment when the child turns seven years old, won't grow into a treasure trove if it's left to accumulate tax-free on its own in a basic account. With modest returns of at least 5 per cent a year, rough estimates suggest it would barely nudge £950.
Although Mr Brown wants to foster a savings culture among poorer families, it's high earners who are expected to benefit most. Children whose parents can afford to invest the maximum £1,200 each year on top of the original £250 sum could come of age with as much as £35,000.
Not all is gloom, though: the supermarkets could yet come through to carry the torch for child trust funds. Sainsbury's Bank is the only one to commit so far but Asda is understood to be interested. If they could take the initiative with the funds as they have with credit cards and savings accounts, the scheme will at least get a kickstart.
It was hardly a message of Christmas cheer. Scottish Widows and Lloyds TSB Life announced last week that they were joining the growing list of mortgage companies to impose a time limit on endowment mis-selling complaints.
From February, some 305,000 mortgage endowment customers will have three years in which to complain if they receive a letter warning of possible shortfalls.
Earlier this year, a Treasury Select Committee hearing highlighted how millions of homebuyers potentially mis-sold an endowment loan had yet to come forward.
This is a timely reminder to look at your policy. If you were mis-sold an endowment, you have a right to compensation.
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