William Kay: What to charge? Teething problems ahead for the new Child Trust Fund

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The draft rules for the child trust fund (CTF), published this week ahead of the scheme's launch in April next year, do not bode well for the Sandler suite of allegedly flameproof savings products due out at around the same time.

The draft rules for the child trust fund (CTF), published this week ahead of the scheme's launch in April next year, do not bode well for the Sandler suite of allegedly flameproof savings products due out at around the same time.

The Treasury said this week that the CTF will cost holders 1.5 per cent a year, plus Stamp Duty and dealing costs which will add about one percentage point. Previously the Government was adamant that these extras would be folded into an overall one per cent limit.

The financial services industry has clearly made a good job of crying the poor tale, but the new total of about 2.5 per cent looks like a bonanza for the money managers. It also suggests there is a rip-off in the making over Sandler.

The Sandler stakeholder plan emerged from Ron Sandler's report into long-term savings in 2002. This envisaged at least a pension, a mutual fund or unit-linked life fund and a with-profits product. These would be so low-risk that investors could buy them off the shelf, keeping management costs down.

Remember, Sandler and the CTF are not individually tailored. We are not talking Savile Row here, but more like basic Burton. They will be avowedly mass market, enabling providers to have small groups of managers handling huge amounts of money.

There are 700,000 births a year in Britain, each to be credited with an instant £250, or £500 if the parents are receiving child tax credits. That will add up to at least £200m year to manage, plus whatever doting relatives contribute. The Treasury will add another dollop when each child is seven.

I realise that this money will be divided amongst several providers, but handling it will not be the most taxing job. Most will go into a default fund, in the absence of any parental preferences, which will go into a form of tracker, switching to fixed-interest as the child nears 18.

We have had the usual pious platitudes that the 1.5 per cent-plus will only be the ceiling, and competition is bound to whittle that down. Don't hold your breath.

The Chancellor, Gordon Brown, has been forced to believe industry threats that unless the charges were high enough they would boycott the CTF, a gesture which would have left Mr Brown with more egg on his face than when he is feeding his baby John.

Similar egg-avoidance aims will ensure that the one per cent target contained in the Sandler plan will be exceeded. Ever since that was published, the industry has been banging away at anyone who would listen, saying one per cent was not enough.

The attractions, to investors and providers alike, have been shrunk by the pensions and with-profits mis-selling scandals that have emerged.

But, more significantly, it was clear from the outset that no products can be sold without advice: at the very minimum, a responsible seller has to know the would-be customer's financial position. The CTF climbdown suggests that the Treasury brainboxes have finally got the message.

Meanwhile, those in the know can go to the likes of F&C, Alliance or Isis and pay a fraction of one per cent to have their money invested: indeed, it's the rich wot gets the pleasure.

Rate hike threat for buy-to-let investors

The first cracks have begun to appear in what has until now been a fairly relentless optimism from promoters of buy-to-let mortgages.

The trends have been going against them for nearly a year: stock markets recovering, interest rates rising, house price increases cooling. But this has not bothered the acolytes of this near-religion. Until now.

The quarter-point increase in Bank of England base rate spooked at least one buy-to-let mortgage expert.

David Whittaker, managing director of Mortgages for Business, said: "With [this week's] interest rate rise and further increases anticipated, investors might well find themselves in a position where their mortgage payments exceed their rental income."

That is a stark message to investors in this extremely shaky market. I know of no other form of investment where buyers routinely borrow as much as 80 per cent of the cost.

If that was common practice in stock market investment, commentators would be shouting warnings.

Mr Whittaker wants to frighten buy-to-let investors with tracker or discounted mortgages to convert to fixed-rate deals while the going is good. But that is only one side of the equation. Higher interest rates and a squeeze on consumer spending will sooner or later hit rents as well as residential property values.


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