Treasury offers sweetener on child trust funds with 1.5% cap

The Government has given the first indication that it is willing to let providers charge more than 1 per cent for managing stakeholder funds.

The draft regulations for the Child Trust Fund (CTF), published yesterday, allow providers to charge 1.5 per cent plus the costs of buying and selling securities, plus 0.5 per cent stamp duty. This will add up to about 2.5 per cent a year, according to industry estimates.

The big question is whether this means the Treasury will relent on its intention to impose a 1 per cent charge cap on the so-called Sandler suite of stakeholder funds. Like CTF, these are due to begin next year.

The Treasury said: "The Government's decision to set the [CTF] cap at 1.5 per cent was based upon all available evidence, and it recognised that the CTF had certain key characteristics that were not typical of other products in the stakeholder suite, including pensions. In particular CTF accounts will be smaller in terms of the average size of funds compared with pensions and will have a lower minimum contribution level than other stakeholder products."

The lower minimum contributions make it more important to guarantee providers a certain level of commission income. But the industry pointed out that, while Sandler product contributions would be higher, so would the cost of advice and distribution.

The CTF 1.5 per cent decision was immediately welcomed by the financial services industry, many of whose members had said they were unwilling to operate CTF accounts if they could charge only 1 per cent.

Gary Withers, the chief executive of Norwich Union Life, said: "At 1 per cent it was difficult to see how it could have made economic sense."

Ray Milne, the managing director of Halifax Financial Services, said: "We welcome the Revenue's announcement and fully support the Government's initiative to encourage the saving habit in parents and the young. Our own research shows that about a third of parents do not open any savings or investment accounts for their children and a similar proportion do not encourage their children to save, so there is clearly a need for initiatives such as this."

Nigel Snell, a spokesman for Liverpool Victoria, said: "It's encouraging, but it's too early to say how it would work."

The CTF is due to start in April next year. All children born after 1 September 2002 will be eligible for a CTF account.