Child Trust Funds to be scrapped

Baby and parents The Child Trust Fund system began in 2002

The coalition government has announced that it will stop all payments to Child Trust Funds by January.

Payments under the scheme will be sharply reduced from August in the build-up to its full withdrawal.

At present, parents of newborns receive a minimum £250 voucher to invest for their children. They can have access to the money from the age of 18.

A further payment is made when the child reaches the age of seven. This top-up will be scrapped from 1 August.

Chief secretary to the Treasury, David Laws, said halting these payments to newborns from the end of the year - and the top-up payments - would save £520m.

Some £320m will be saved in 2010 and 2011, rising to £520m in 2011-12.

What about my fund?

If it has already been opened, it will continue as usual - and the child will not be able to touch the money until the age of 18.

The tax-free element will continue. No tax is paid on any income or gains in the account.

Family and friends will still be able to add up to £1,200 a year into the account.

The government will not withdraw the money it has already put in the account.

Saving scheme

Child Trust funds were set up by the Labour government to encourage parents to save for their children.

Start Quote

I know that this will be a disappointment to some parents, but we need to be honest about what we are doing”

End Quote David Laws Chief secretary to the Treasury

The idea was for children to have some savings at the age of 18, to assist with costs such as university funding.

Parents, family and friends can contribute up to £1,200 a year to the account, with no tax to pay on any income or gains in the account. This money is often invested in shares.

At present, the government gives £250 in the child's first year and the same amount again when a child reaches the age of seven.

If the child is born into a family where the household income is £16,190 or less, then the initial payment is £500.

Since April 2010, a child eligible for Disability Living Allowance also gets a yearly top-up of £100, or £200 if the child has a severe disability.

Now the axe will fall on these payments.

"From 1 August, payments at birth will be reduced from £250 to £50 for better off families, and £500 to £100 for lower income families [household income of less than £16,190]; and payments at age seven stopped," the Treasury announced.

All payments will be stopped from 1 January 2011.

"Additional contributions for disabled children will be paid this year. From 2011-12 the money used for these additional contributions will be redirected to respite care for disabled children," it said.

Child Trust Fund voucher Parents receive a voucher for £250 after a child is born

Mr Laws said it was "deceiving" people if they were handed funds that were from borrowed money.

"I know that this will be a disappointment to some parents, but we need to be honest about what we are doing," he said.

"At present, the child trust fund is based on the claim that young people will build up an asset which they can use later in life.

"But since government payments into the scheme are essentially being funded by public borrowing, the government is also storing up debts which will have to be repaid by the same young people."

Funds

Three out of four parents put the voucher into accounts which are invested in shares.

However, these funds were hit by the economic downturn, although share prices have recovered somewhat since.

The decision met with some condemnation. David White, of the Children's Mutual, said he was "staggered" by the announcement.

"The Child Trust Fund is the single most successful savings policy to date and this sort of short-term cut does not address the pressing need for families to save, or recognise the significant benefit to society that the Child Trust Fund will bring from 2020 as maturing funds return an anticipated £2.96bn each year to the economy," he said.

"There is still time to reverse this decision so we will be talking to every MP across the country to help protect the Child Trust Fund for future generations."

Before the latest announcement, the Social Market Foundation think tank had urged the government not to scrap the scheme, suggesting it reform them to make them cheaper to run instead.

It said the amounts should be cut, and millions could be saved by ending tax relief on children's savings accounts that were not Child Trust Funds.

The group also suggested a series of measures to help encourage people on low incomes to save for their children.

Andrew Hagger, of financial website Moneynet, said: "It is a short sighted decision to axe a savings scheme that would have given a vital financial boost to the next generation."

He has calculated that by saving £22.50 per month on top of the two £250 payments from the state, a Child Trust Fund with growth at 4% would have been worth £7,964.70 by the time a child reached 18 years of age.

Child Trust Funds cover the whole of the UK. However, at present, children in Wales get an extra £50 at the age of seven, or £100 if they are from a low-income household. The Welsh Assembly must decide whether this continues.

We asked you for your views on the scrapping of Child Trust Funds. Here are a selection of your comments.

This is very sad for the children we are bringing into this world as the money could be a big help when they reach the age of 18. As a working parent, I feel they should keep something in place but a system where everybody gets the same, and it's not just lower income working people who get more. Why is that fair? It is meant for the child not the parent after all.

Caroline, Manchester

My child is due in August, and I will 'lose' £200 as the figure drops to £50. To be perfectly frank I'm pleased to bits, as I always felt this, like the Health in Pregnancy Grant, was an expense the UK taxpayer can ill afford.

Becky, Epsom

How unfair on my unborn baby who is due at the beginning of October. They miss out on something that was promised! Why couldn't this be cut in nine months' time and then everyone knows that it will be gone! So unfair!

Aly, West Sussex

It's not clear whether parents are going to be stopped making additional payments from 1 August. If they are stopped, the government must surely allow parents to draw down the value of their CTF and put it into another savings vehicle?

Tim, Cardiff

I have twin girls aged seven, born March 2003. They were due to receive the top up in March this year. It seems to me this decision was already taken before the new government, as they have not received the top up or any explanation. Now we are told that it ceases from 1 August. This is disingenuous at the least.

PS Pieri, London

I have a trust fund for my daughter who was born in 2002. It struck me that the whole concept, which appeared wonderful at first glance, was not thought through at all. There we were, hard-working parents piling in up to £100 a month over 17 years in this scheme and at the end we would have no actual control of the money when our offspring reached 18 - a time when they needed to be concentrating on their studies not the size of their bank balance. That generation of kids would have been stalked by credit card giants from 16 onwards. Lambs to the financial slaughter. Any normal person would go a little wild when handed over several thousands pounds. How is a 18-year-old supposed to cope? I'm glad they're going to be scrapped. I stopped paying into mine when the initial provider, who I spent weeks choosing, decided to hand that side of their business to another firm. I spent my monthly £100 on providing music lessons for my daughter. The way I see it I'm still investing in her future, but the returns are guaranteed!

Sylvie Dalton, Worcester

With a disabled two-year-old and a new baby on the way, this announcement hits me in the pocket to the tune of £3,850. Plus I work in the public sector so expect to have my salary frozen or get made redundant over the next few years. It's a brave decision to to take money away from disabled children in your first act in government, let's see who they target next - I bet it's not big business.

Stuart Nixon, Staffordshire

I agree with this cut. Although I have always been a Labour supporter, I have always thought this was a complete waste of money. I have invested my three children's vouchers and add to their account monthly, but I would have saved for them anyway. I don't think this scheme encouraged any parents to save for their children's future that wouldn't anyway. Well done the new government for thinking sensibly and risking a bit of a parental backlash!

Sarah Hackett, Bromley

The Child Trust Fund was an amazing idea - the plan to give children some money when they reached 18, their own money. It would have changed life and perspectives for everyone. As we know, this Cabinet has no interest in this kind of thing - all their children and grandchildren will be very well heeled for their entire lives.

Pam Roud, Maresfield

Not only the baby but also the bathwater has been thrown out! It is surely a good thing that we should set aside money for the next generation. The scheme could have been modified so that saving was still encouraged but the cost to the taxpayer was minimal. You can still start a stakeholder pension for a child and get 20% tax relief so if you invested the maximum amount of £2880 then the taxpayer adds £720. This seems like an anomalous situation.

K R Adams, London

I feel this is a shamefully bad start to a new government. I would have expected the Conservatives to act is this vindictive fashion to ditch a flagship Labour policy, but for the Liberal Democrats to acquiesce in this theft from children is abhorrent. It smacks of Margaret Thatcher's removal of free school milk for children in the 80s. I save £100 per month in a Child Trust Fund so that the state will not have to support my children through higher education, bursaries or benefits. This is a slap in the face. The children of the UK are in fact paying for the excesses of the bankers. It is an absolute disgrace!

Patrick Davidson, Belfast

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