Gordon delivers on his promise to British babies

... but, says Melanie Bien, new Child Trust Funds will be of limited help to poorer families

Fears have been expressed that the eagerly awaited Child Trust Fund (CTF) may turn out to be another stakeholder pension - benefiting the wealthy but of limited use to families on more modest incomes.

Although CTFs - unveiled last year by the Chancellor of the Exchequer, Gordon Brown - are intended to encourage young people to get the savings habit, critics argue they don't go far enough. Under the proposals, more details of which were confirmed last week, all children born since September 2002 will get a kick-start payment of £250 from the Government when CTFs are introduced in April 2005. Children from less well-off families will receive up to £500. A further, as yet undisclosed, payment will follow at the age of seven.

Capital growth and income is tax-free and will be made available when the child reaches their 18th birthday.

"These plans are only a small step in the right direction," says Ian Luder, tax partner at accountants Grant Thornton. "The tax relief available is minimal and the initial government contribution modest. What would have a much greater impact on savings trends is [a scheme by which] the Treasury would match private contributions pound for pound up to £250 per year."

He argues that the wealthy are more likely to benefit from CTFs than the poor - something the Government's own figures confirm - since relatives will be allowed to invest up to £1,200 a year for them.

Anne Redston, partner in accountancy firm Ernst & Young's tax practice, agrees. She calculates that if relatives invest the maximum £1,200 a year in a CTF, added to the £250 initially donated by the Government and an estimated £250 when the child reaches the age of seven, the fund will be worth around £34,760 after 18 years, including compound interest of £12,660.

But if relatives cannot afford to invest £1,200 a year, the Government's contribution will grow only to around £1,000, including compound interest of £500. While £34,760 is a decent sum of money that could be put towards university fees or buying a first home, £1,000 won't stretch far at all. This is all the more worrying given that just one in 10 people are currently saving for their children through an individual savings account, personal equity plan, investment or unit trust, or open-ended investment vehicle, according to research for Fidelity Investments by Mori.

As part of its announcement, the Treasury also emphasised that the 18-year period for which a CTF is invested will allow parents to opt for equities instead of a cash-based savings account. When held long enough to ride the ups and downs of the stock market, equities are the best way of making that money grow - however little is invested in the fund.

But there was precious little detail about the selection of funds parents will be able to choose from on behalf of their offspring, although investment trusts were mentioned as one option.

Another detail the Treasury has yet to reveal is what charges will accompany CTFs. This is difficult to get right: set them too low and providers won't offer the funds or promote them properly because it won't be in their interests to do so. This is, in effect, what has happened with stakeholder pensions, which have a 1 per cent price cap.

But if the Government allows the fund management houses to charge too much, administration costs could swallow a large chunk of that initial £250, warns Tim Cripps, partner at accountant Moore Stephens.

Alongside the news on CTFs, the Treasury announced its intention to step up financial education for young people. "The Government needs to be good to its word and put money behind the educational campaign," warns Scott Mowbray at Virgin Money. "Otherwise the potential of this groundbreaking scheme could be lost and a generation of 18-year-olds will be left underwhelmed by the proceeds of their Child Trust Fund."