The Child Trust Fund scheme, which is central to Gordon Brown's dream of a "savings gateway", has the financial potential to change the life of the beneficiaries on their 18th birthday
By Jeremy Gates
Although few of them yet know it, more than two million children in Britain now hold Child Trust Fund (CTF) accounts - and this month (September), the oldest children holding these accounts reach their sixth birthdays.
They are then a third of the way down the road to the lump sum which might - possibly - change their lives on their 18th birthday.
At least, that's the theory behind a scheme central to Gordon Brown's dream of a "savings gateway" which eventually launched in April 2005. CTFs were offered to all children born on and after September 1, 2002.
They have so far received a Government voucher worth £250, will collect another worth £250 at seven and might collect a third handout - yet to be confirmed - at 13.
Children in families receiving Child Tax Credit (CTC) - with a household income below the CTC limit - get vouchers worth more than £250.
Parents are expected to invest the vouchers - in building society accounts or managed funds holding shares - on behalf of their children. If they do nothing, the taxman eventually invests it on their behalf.
The money can then grow, free of tax at any stage. Eagle-eyed parents have spotted that some building societies pay very generous interest rates indeed on these accounts.
Best payer right now, reckons financial data website Moneyfacts.co.uk, is Hanley Economic BS paying 7.75% with Britannia (7%), Chorley and District BS (6.75%) and Yorkshire BS (6.55%) not far behind.
However the money, like a pension contribution, is locked in and cannot be accessed even by families in financial difficulties.
On their 18th birthday, all CTF holders are entitled to withdraw their money and parents can not exert any controlling influence on the decision at all. There is a clear risk the money will buy more old bangers than BAs.
"If Johnny or Julia is a spendthrift, there is obviously scope for parents who have seen considerable sums added to CTFs over the years to be a little disappointed," says Ian Benning, product director at The Share Centre, which administers some 70,000 CTF accounts.
The Share Centre is currently campaigning for Government to lift the value of its vouchers, in line with inflation. In 2008 it reckons the vouchers should really be worth £288 - to match the original vouchers when the scheme began.
But of course, it is the extra money, added by friends and family to the Government's gifts through childhood, which will largely determine the success or failure of CTFs.
If nothing at all is added to the £500 Government handout except annual interest, 18-year-olds will collect barely £1,000 - no big deal alongside student debts on graduation which currently average about £13,000.
However The Children's Mutual, the friendly society which reshaped itself to focus entirely on the management of CTFs, is ready to hail a great success story.
"The children who hold these accounts, their parents and society should celebrate the fact the CTF is changing saving habits in the UK," says chief executive David White.
The Children's Mutual says the average top-up to the CTF accounts which it manages is £24 per month, which would deliver a lump sum of £9,750 if maintained regularly until the 18th birthday.
The maximum investment allowed by the taxman is £100 per month. The Children's Mutual points out that if "grandparents, aunties, uncles and friends work together" to hit this limit every month, the eventual lump sum would swell to £37,100 - tax-free.
David White, CTF's chief executive, is also pleased that four in five of his CTF accounts are based on shares - both stakeholder, with management fees tightly controlled, and non-stakeholder, more likely to appeal to parents more familiar with the concept of equity investment but quite probably incurring higher management charges.
Jason Hollands at fund manager F&C Investments, which holds over 55,000 CTFs, is also cautiously optimistic about the concept.
"Around 65% of our accounts have already been topped up which suggests our customers want to play an active part in building CTFs over the long term which should deliver superior returns from equities," he says.
F&C offers a choice of 17 funds invested in the UK and around the world. It even offers F&C Event Driven, a fund of hedge funds, for parents taking a racy investment approach.
However, the CTF story is hardly one of unbroken success.
Figures from the taxman (HMRC) at the start of the year show that only 24% of CTF accounts opened so far - about 600,000 - have received any additional funding whatever, with just 1.2% receiving the maximum funding.
Of 70,000 CTFs accounts held by The Share Centre, some 8.7% have received further top-ups to the original vouchers.
One child, says Benning, has a fund which has been boosted by the maximum £1,200 per year in each of the past four years and it is already worth £7,200, with the child barely into formal schooling.
If our egalitarian instincts survive the 2012 Olympics, imagine the howls of envy which could encircle any members of that tiny minority lucky enough to collect a full £37,000 handouts from 2020 onwards.
Suppose these fortunate Lord and Lady Fauntleroys, out on the town to celebrate their good fortune, were to find themselves surrounded by contemporaries from families who left their CTF vouchers in the letter rack.
The really depressing fact about CTFs is that a quarter of the parents eligible to receive Government vouchers haven't bothered to do anything at all with them. Nationwide BS reckons the vouchers are worth more than £248, resulting in potential waste of interest earned of nearly £13bn.
According to Unbiased.co.uk, which represents financial advisors, if half of those accounts which receive no additional funding got the maximum £100 per month from other family members, potential tax savings could top £240m a year.
Although its success may be as yet unproven, there is clearly a good argument for affluent grandparents, fearing the impact of Inheritance Tax (IHT) on their estates on death, to consider switching money regularly into CTF accounts held by younger family members to keep it away from the taxman.
The obvious problem is that once one child gets regular CTF top-ups, any brothers and sisters deserve similar support.
Many cash-strapped families might find it hard to contemplate locking spare cash away for a year in the coming months, let alone 18 years for a child who may then fritter it away before they know what to do with their lives.
::INFORMATION: The Government's official website for CTFs is www.childtrustfund.co.uk.
Providers include Children's Mutual (08450 771 899 and www.thechildrensmutual.co.uk); The Share Centre (01296 414 141 and www.share.com); F&C Investments (0800 136 420 and www.fandc.com/ctf).
POUNDNOTES
:: The cost of unsecured personal loans is rising fast, says Simon Linstead at price comparison site uSwitch.com, who reckons the average rate for a £10,000 loan over five years is up from 8.74% APR to 9.14% APR in seven weeks.
"The latest rises will add further pressure on the nine remaining lenders offering rates below 8% for £10,000 over five years", he says.
"No wonder unsecured personal loans have already taken a nose-dive this year, with the total amount issued to consumers dropping by a staggering £2.6bn."
Linstead gives these "best buys" for £10,000 over five years: ASDA; Your Personal Loan.co.uk; Sainsbury's Finance; Lombard Direct and The Post Office.
:: Many borrowers ending two and three year fixes in the first half of 2008 were tempted to take standard variable rate (SVR) loans because new fixes and tracker rates looked too expensive.
Now, says Tom Girling at Yorkshire BS, rates are falling again to make SVR's less attractive. Yorkshire BS recently cut rates on fixes by up to 0.55%, doubling applications.
One of its most successful products is the 5.54% two year fix, with an £895 fee - a better bet - says Mr Girling, than SVRs topping 7%.
Yorkshire BS enquiries : 01274 740 740 and www.ybs.co.uk.
:: Small investors are beginning to see the appeal of Bradford & Bingley again, says leading execution broker TD Waterhouse, which has the former building society at number nine in its top 10 buy lists for week ending August 27.
Small investors are even bold enough to dabble in housebuilders; Barratt Developments is at number seven, and shell-shocked Taylor Wimpey - battling to survive in Britain, the Spanish Costas and the US - is one place higher.
However the High Street banks dominate the Waterhouse league. Top five buys in descending order are Lloyds TSB, BT, Barclays, Royal Bank of Scotland, and HBOS.
Amazingly Woolworth takes eighth place, with insurance giant Aviva at number 10.
Waterhouse enquiries: 08456 076 001 and www.tdwaterhouse.co.uk.
:: Don't believe the scare stories about another British bank going the way of Northern Rock, counsels Ted Scott, manager of F&C's UK Growth and Income Fund. He believes Northern Rock was an "isolated case" which perished because of its reliance on the wholesale banking market, and points out that other banks have shored up balance sheets through rights issues, share placings and even - in Barclays case - by tapping into the assets of sovereign wealth funds.
"Banks will continue to find it tough going and may well have to raise further funds via the equity market or by selling assets, but another Northern Rock is unlikely," Scott says.
:: HIGH FIVE SAVERS:
Phone No Rate Account Period Deposit Interest paid
ICICI Bank UK www.icicibank.co.uk 7.20% (F) HiSAVE Fixed Rate 12 Month Bond £1,000 OM
First Save www.firstsave.co.uk 7.10% (F) Fixed Rate Bond One Year £1,000 OM
Heritable Bank 08456 071 212 6.60% 60 Day Notice Issue 2 60 Days (B) £1,000 Yly
Whiteaway Laidlaw Bank Ltd 01618 335 444 6.56% 60 Day Bonus 60 Days £1,000 Yly
Anglo Irish Bank 08454 552 222 6.55% Seven Day Notice Two Seven Days (B) £1 Yly
:: TOP FIVE BORROWERS:
Phone No Rate Period Max% Adv Fee Incentive
HSBC 0800 494 999 5.49% for two years 90% £999 Yes
West Bromwich BS 08002 980 008 5.59% to 30/09/13 75% £999 Yes
Cheltenham & Glos 0800 272 131 5.95% for term 75% £1,094
Market Harboro BS 01858 412 250 5.95% for term 80% none
First Direct 08456 100 100 5.99% for term 90% £399
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)
