Money news, advice and predictions for savers and spenders.
By Jeremy Gates
Although Gordon Brown will probably go down in history as the big spender who couldn't turn the taps off when the crunch came, he did leave two good savings schemes behind when he walked out of Downing Street.
The first, ISAs, were a remodelling of the Tories' TESSAs - killed off in April 1999, but at least Mr Brown's version proved as successful as the original prototype.
Today, ISAs hold more than £170 billion in cash, equities, bonds and investment funds - safe and secure with capital gains and most of the income they generate beyond the taxman's reach.
The second was the Child Trust Funds (CTFs) scheme, which proved much better in principle than in practice. The scheme perished this week in the first cuts forced on the coalition Government by Britain's massive debts.
All children born since April 2002 got a Government voucher worth at least £250 to open a tax-free savings plan, with another £250 voucher promised on their seventh birthday. Children in poorer families got more.
Topped up by friends and family to a limit of £1,200 a year, a CTF could have produced a lump sum of £32,329 at the age 18 - the perfect lift-off for adulthood.
For babies born after August 1, 2010, the Government payment will now fall from £250 to £50, although children in families earning less than £16,190 will get £100.
There will be no further top ups at seven, but existing CTFs (5 million of them were set up in the past five years) will grow tax-free until the holder's 18th birthday.
On January 1, 2011, the scheme is scrapped altogether, meaning only children currently aged eight or younger (and a few still unborn) will ever qualify for it.
Critics of the scheme never lacked ammunition.
Karen Barrett, chief executive of unbiased.co.uk, says: "Only 71% of eligible children had a CTF opened for them, and only a quarter of the CTF accounts opened since 2005 recorded additional deposits."
But others in the savings industry are disappointed - not least because some CTFs holding equities (about 80% of the total) were beginning to 'motor'.
According to finance website Moneyfacts.co.uk, the F&C FTSE All-Share Tracker grew by 46.4% in 2009/10, closely followed by Legal & General's UK Index Trust (46.1%).
Leading the way over the lifetime of the CTF is the Baillie Gifford Managed Fund, which delivered a return of 46.1% to turn the initial £250 into more than £365.
Supporters of CTFs think any scheme which supports saving should be nurtured, rather than dumped, in today's environment when the dangers of over-spending, at both Government and personal level, are so painfully obvious.
Andrew Hagger, at Moneynet.co.uk, says: "If CTFs had continued, in September 2020 when the first accounts would have matured, a stream of 18-year-olds would have started adult life on a much sounder financial footing than previous generations.
"If £22.50 per month was added to two £250 payments from the State, a CTF with a modest growth of 4% would be worth £7,964.70 at age 18."
Gavin Oldham, chief executive of The Share Centre, says: "Cuts must be made. But the CTF structure, without Government contribution, should remain available for voluntary opening and contributions by family and friends.
"As it is, children lucky enough to have a CTF when the axe falls will not only be able to keep it, but also receive an additional £1,200 per annum from the contributions of family and friends.
"However, once the legislation has been passed, no tax free savings can be made for newborns until they reach 16, when they can open an ISA."
Kevin Mountford, head of banking at moneysupermarket.com, says: "CTFs were an admirable idea, but never got chance to bolster a long-term savings mentality.
"The bigger problem is that we really need to encourage people to believe that saving is worthwhile - regardless of the label these accounts are given.
"Latest inflation figures show even basic-rate taxpayers need an account paying above 4.63% to break even and you'd be hard-pressed to find anything topping 3% at the moment.
"A concerted effort between Government and the savings industry is vital to make saving attractive again."
Few did more to promote CTFs than David White, chief executive of The Children's Mutual, a friendly society managing 800,000 CTFs. He thinks they achieved a great deal.
"The CTF helped the parents of more than five million children to start saving for their futures, and the initiative is one of the most successful Government-backed savings schemes ever", he says.
"The take-up rate comfortably exceeded pensions and ISAs. Three times as many parents are saving regularly for their children than there were before the scheme started."
So what do parents need to do now, to give their children as much support as possible?
A survey of 2,000 parents of under-18s by fund manager F&C Investments, a CTF provider, found 70% of parents of under-eights will keep saving in their children's CTFs - some 16% are undecided, and 14% will stop saving in them altogether.
However, as the stream of new customers dries up, there is a big danger that banks and building societies will offer poorer rates on their accounts: although Hanley Economic BS offers 5% through branch-based accounts and Yorkshire BS offers 3%, many rates will soon be heading for the derisory levels imposed on older savers since late-2008.
What's really important is that the idea of regular saving by and on behalf of children, with a long-distance target, is not lost altogether.
There's a wide choice of alternative schemes: F&C Investments, for instance, offers a Children's Investment Plan investing payments from £25 per month in a range of investment trusts.
The Share Centre runs a Junior Investment Account which holds children's money in a range of funds, with graded levels of risk. Over 18 years, these should comfortably outperform cash left in banks and building societies.
Some friendly societies still provide tax-free savings schemes for children, accepting a maximum £25 per month. The Children's Mutual still runs a Baby Bond - although this, and others like it, took a back seat when CTFs arrived.
Now, says David White, new savings scheme are needed to serve children born after January 1, 2011. He has had talks with the Government to see how these might work.
Kate Moore at Family Investments says alternative savings plans are being considered, which will have to be more flexible than those £25 per month tax-free savings schemes.
James Budden, at fund manager Baillie Gifford, says: "While the Government handout may be missed, perfectly good and in many cases better methods of saving for children still exist.
"In the long run, consumers may actually benefit from the demise of CTFs, such was the variable quality of investment choice available within the CTF wrapper.
"Its removal should refocus people's minds towards a wider range of potentially better-performing funds."
Any parent of a child born before January 1 should get a CTF up and running - simply to take advantage of a tax-free shelter.
Beyond that, we should all look out for the replacement savings schemes likely to emerge in 2011.
:: Information: Vouchers to open CTFs can be obtained by visiting www.childtrustfund.gov.uk; Family Investments (call 0800 616 695 and visit www.family.co.uk) holding 1.1 million CTF accounts has an update on its website advising parents what to do next. Children's Mutual (call 0845 077 1899 and visit www.childrensmutual.co.uk); F&C Asset Management (call 0800 136 420 and visit www.fandc.co.uk).
Poundnotes
: : May 30 is Tax Freedom Day - when taxpayers stop working for the taxman and start working for themselves.
The date actually falls three days later than in 2009, because of the VAT jump from 15% to 17.5% at the start of the year.
Yet the website unbiased.co.uk, which promotes financial advisors, says the burden for taxpayers is heavier than it needs to be because they waste £9 billion by squandering tax breaks, reliefs and credits, and by paying fines for late and inaccurate tax returns.
Karen Barrett, at unbiased.co.uk, says: "For 149 days of the year, until May 29, every penny earned by UK residents will be taken to pay for Government spending."
:: Small investors backing emerging markets in the past decade enjoyed the best returns on their money, says the latest analysis from the Association of Investment Companies (AIC).
It names the five 'most consistent' funds in the past 10 years as BlackRock World Mining (thanks to the gold boom), Fidelity European Values, HG Capital, Invesco Perpetual UK Smaller Companies and British Empire Securities & General.
Over 10 years, BlackRock World Mining turned £100 into £911. Stellar performances came also from Scottish Oriental Smaller Companies (£684) and Baring Emerging Europe (£609).
Evy Hambro, manager of BlackRock World Mining, says demand is surging for copper, iron ore and coking coal both from emerging nations and developed economies starting to recover. Add in 'the China effect', and commodity prices are recovering fast from the lows of 2008.
:: On traditional car insurance policies, premiums to add an L-plate driver can top £3,000.
So motoring accessories giant Halfords has teamed up with Provisional Marmalade to offer fully comprehensive cover on a family or friends' car for only £3 per day.
The new policy, written in the name of the learner driver, costs £90.95-£99.50 per month and - even better for fathers - can be paid for by the learner.
:: The choice of five-year fixed-rate mortgages has increased more than tenfold, from 39 in April 2007 to 411 today, says Hannah Mercedes Skenfield at Moneysupermarket.com.
She thinks lenders are keen to lock in borrowers for long periods, but the huge supply suggests take-up of many products might be low.
This week, Nationwide BS joined the rush, with various reductions on five-year fixes which now start at 4.88% (up to 70% LTV), with £99 booking fee and £896 product fee, but no valuation and legal fees.
:: High five savers
Phone No Rate Account Period Deposit Interest paid
Coventry BS 0845 766 5522 5.00% (F) Fixed Bond (4) 31/08/15 £1 Yly
ICICI Bank www.hisave.co.uk 5.00% (F) HiSAVE Fixed Rate Five Year Bond £1,000 Yly
AA www.theAA.com 4.55% Internet Fixed Rate Five Year Bond £1 Yearly
Close Savings 0207 392 1772 3.15% Premium Gold 180 Day 180 days (B) £10,000 Qly
United Nat'l Bank 0800 218 2266 3.02% Three Month Gold Deposit Three Months £1 Half-yearly
:: Top five borrowers
Phone No Rate Period Max% Adv Fee Incentive
First Direct 0845 610 0100 2.39% variable for term 65% £499 Yes
ING Direct (UK) 0845 603 8888 2.55% disc to 31/05/12 70% None
Market Harboro BS 01858 412250 2.95% to 31/08/12 80% £995 Yes
Loughboro BS 01509 610707 2.99% for three years 75% £799 Yes
Co-op Bank 0800 633 5286 3.99% to 31/08/15 75% £999 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).
