Stuffed down the back of the sofa: a chance of financial security for children

With family finances more and more strained, Kate Hughes finds parents still failing to grasp the benefits of the Government's tax-free savings gift
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The Independent Online

If £250 was to be given to each pupil on a certain day at school, parents would move heaven and earth to make sure their kids were at the front of the queue with their hands out.

But when it comes to the child trust fund (CTF) initiative, under which the Government gives children a £250 tax-free voucher to be invested until their 18th birthday, the uptake has been far lower than many financial experts and pol-icy makers had hoped.

This weekend marks the third anniversary of CTFs, but what on paper looks to be a great deal for children has failed to grasp the imagination of enough families. Evidence even suggests that the number of vouchers being invested by parents is dropping.

Every child born after 1 September 2002 is entitled to receive £250 from the Government (or double that if the family is on a low income). Parents, grandparents, family and friends can add up to £1,200 to the fund every year, and once the child turns seven, the Government will put in another £250 or £500. The money can't be touched until the account holder is 18, at which point they are free to use it as they wish. The idea is to give the child a head start in life and help them meet university fees or even buy their first home.

Parents can choose to plough their CTF voucher into a specially designed savings account, invested either as cash or shares. Once the voucher has been issued, parents have a year to open such an account, or HM Revenue & Customs (HMRC) will open one for them. As HMRC operates a rotation system, simply spreading neglected vouchers between the financial firms offering CTFs, money invested in this way is unlikely to be earning the best possible returns.

Nearly a quarter of parents who received the first round of vouchers failed to invest them within the time limit. Once the fanfare surrounding the introduction of CTFs died down, parental inertia became even more pronounced. In the next full tax year, 30 per cent of CTF vouchers were left untouched by parents.

As for the tax year just ended (2007-08), the trend seems to be continuing. Up to the beginning of January, just 40 per cent of CTF vouchers issued had been invested.

"Vouchers that are collectively worth millions of pounds have either been chucked in the bin or left languishing in drawers or stuffed behind the sofa," says Jason Hollands of fund management group F&C Investments. "Education and raising awareness are paramount, and both Government and providers have an important role to play."

But even when the thousands of untouched vouchers are finally invested by default, many parents either fail or cannot afford to add anything more to CTFs. And fears of a recession this year could further cut such top-ups, warns Engage Mutual Assurance. In a survey conducted by the firm, one in five parents said they would have less money to put towards their children's savings this year than last.

"With the increased cost of food, fuel and mortgages taking effect, many parents anticipate finding it increasingly difficult to make ends meet in the year ahead," says Karl Elliott from Engage. "However, they should endeavour to continue saving little and often for their children's future even if it's just £5 a month."

Those parents who do take an active interest in CTFs would be well advised to shop around for the best deals. As with any savings product, the difference between the best and worst on offer can be considerable. Take cash CTFs, for instance. The Hanley Economic Bbuilding Society pays a whopping 8 per cent interest (although parents who want to take advantage of this market-leading rate will have to open an account at a branch, and there are only a small number of those, all located in the Potteries region). At the other end of the scale, Abbey pays just 5.25 per cent.

For those choosing to invest a CTF on the stock market, it's harder to tell what is the best buy. All the equity CTFs have lost money over the past year, reflecting harder times in the markets.

But some funds are dropping money more slowly than others. According to Moneyfacts.co.uk, the price-comparison site, the Scottish Friendly CTF has lost 3.83 per cent of its value in the past 12 months, while the ethically geared CIS UK FTSE4Good CTF has shrunk by 11.34 per cent. However, stock market investment is for the long term and what is an underperforming fund this year may make a strong comeback in the future.

One thing seems certain, though: the lack of interest in CTFs is worrying the powers that be, as seen by the changes aimed at simplifying CTFs announced in this year's Budget. Parents who haven't invested their CTF voucher will automatically be sent a reminder after eight months. As of April 2009, CTFs can be opened online and by phone without the voucher itself having to be presented.

More remains to be done, says David White of the Children's Mutual, the UK's leading provider of CTFs: "We need to keep reviewing government advertising of the scheme and do more to simplify the information parents receive."

Nevertheless, there are concerns about the long-term prospects for the funds. The amount of investment by parents may not be matching what has been spent by providers on setting up CTF funds, giving rise to fears that some products may be withdrawn because they are no longer viable.

Miles Bingham from CTF provider Family Investments says he hopes they are here to stay, but admits: "A lot of organisations dived into the market in 2004 and 2005 without knowing about how much business to expect, and there have got to be some losers."

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