Sam Dunn: A bucket of cold water over child trust funds

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.

Get complaining

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.

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

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Digital Optimisation Executive - Marketing

    £30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

    Recruitment Genius: Financial Reporting Manager

    £70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

    Recruitment Genius: Payments Operations Assistant

    £23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

    Recruitment Genius: Telephone Debt Negotiator

    £13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

    Day In a Page

    Sepp Blatter resignation: The beginning of Fifa's long road to reform?

    Does Blatter's departure mean Fifa will automatically clean up its act?

    Don't bet on it, says Tom Peck
    Charles Kennedy: The baby of the House who grew into a Lib Dem giant

    The baby of the House who grew into a Lib Dem giant

    Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
    Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

    The harrowing testament of a five-year-old victim of Syria's endless civil war

    Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
    The future of songwriting: How streaming is changing everything we know about making music

    The future of songwriting

    How streaming is changing everything we know about making music
    William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

    Recognition at long last

    Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
    Beating obesity: The new pacemaker which helps over-eaters

    Beating obesity

    The new pacemaker which helps over-eaters
    9 best women's festival waterproofs

    Ready for rain: 9 best women's festival waterproofs

    These are the macs to keep your denim dry and your hair frizz-free(ish)
    Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

    Wiggins worried

    Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
    Liverpool close in on Milner signing

    Liverpool close in on Milner signing

    Reds baulk at Christian Benteke £32.5m release clause
    On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

    On your feet!

    Spending half the day standing 'reduces risk of heart attacks and cancer'
    With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

    The big NHS question

    Why are there so few new GPs when so many want to study medicine?
    Big knickers are back: Thongs ain't what they used to be

    Thongs ain't what they used to be

    Big knickers are back
    Thurston Moore interview

    Thurston Moore interview

    On living in London, Sonic Youth and musical memoirs
    In full bloom

    In full bloom

    Floral print womenswear
    From leading man to Elephant Man, Bradley Cooper is terrific

    From leading man to Elephant Man

    Bradley Cooper is terrific