Child Trust Fund Top Ups For 7-Year-Olds On The Way
By Alison Steed
CHILDREN reaching seven years old from September 1 will get at least £250 to add to their child trust fund (CTF) from the Government.
CTF vouchers will start dropping onto door mats in the autumn, and parents once again will have a year to invest the vouchers for their children themselves, otherwise HM Revenue & Customs will invest them on the child’s behalf.
Take up of the CTF has fallen slightly, according to figures from the Revenue. Of those vouchers issued in the past year, just over half have actually been deposited in accounts, whether investment or cash based. This is significantly down from the average of 74 per cent deposited between January 2005 and March 2008.
Kate Baker, Head of Savings and Investments at Family Investments, the UK's leading Child Trust Fund provider, said: "While the drop in the number of CTF accounts opened is disappointing, these HMRC figures are for the period just before the Government amended the CTF application process and are not a true reflection of the current situation. Since April 6, CTF providers have been given the option to open accounts for parents without requiring them to physically bring or post a voucher. Family Investments has fully embraced this flexibility and parents can now open their account in one simple step over the telephone or via the internet.
"Our own sales data show that this new ‘voucherless' system has had a significant impact on take up which is likely to be reflected in the HMRC's next quarterly figures. The number of Family Investment CTFs taken out in the first month after the introduction of the voucherless process was 14 per cent higher than the previous four weeks.”
The idea of the ‘voucherless’ system is to make opening the account easier, and that is crucial to increasing the take up by parents, said Ms Baker.
She added: “ This is particularly the case with parents from lower socio-economic groups who may have less experience and confidence in using financial products.
"While the introduction of ‘voucherless' was a step in the right direction we believe there is still much more that needs to be done. Since CTFs were introduced it has become clear that unless a parent engages with the CTF as a useful long term savings mechanism right from the start then they never fully utilise its benefits.”
Part of the problem for parents seems to be the amount of choice they have about where to put their childrens’ savings. Even though over the longer term investments would be expected to outperform cash-based savings, at present the position has been reversed because of the market volatility associated with the credit crunch.
Since the scheme was launched four years ago, cash has beaten the investment option, and the latter is what those parents who fail to take action with their child’s CTF vouchers will be put into. Total returns on cash have amounted to 24.2 per cent, according to data from statisticians Lipper and Moneyfacts, which would have turned the £250 initial voucher invested into £310.
In contrast, the average Stakeholder CTF would have lost 7 per cent of its value, meaning the £250 invested four years ago would now be worth £232.
Parents should be careful about rushing for the door though, as the first two years of the Stakeholder CTF growth was much higher than the cash equivalent. In 2005/6 the invested version would have grown 24.2 per cent in that year alone – as much as cash has made over the whole period. The following year, it made 7.3 per cent, while the cash version made 5.3 per cent.
Richard Eagling, Editor of Investment Life & Pensions Moneyfacts, said: “Ever since child trust funds were launched, controversy has surrounded the Government's decision to allow cash as a permissible investment. Critics argue that a deposit account is not a suitable place to hold money for a period of 18 years, as over long periods of time the real value of cash can slowly be eroded by inflation. Despite this warning around a fifth of CTFs are cash accounts.
"Whilst no-one would advocate investing in a cash CTF over the full 18 years, these figures demonstrate the important role it can play as a temporary safe haven during periods of market volatility. Although the stock market turmoil has meant disappointing returns for stakeholder accounts so far, the long term nature of the child trust fund should ensure there is plenty of time for a recovery. Indeed, there are signs that their performance is starting to improve, with stakeholder funds up 8 per cent already this tax year."
Of course, with another £250 in the offing, it is vital to make the right decision about where you should be putting this next round of vouchers.
Jason Hollands, director at F&C Investments, a leading investment-based CTF provider, said: "Whatever recent stock market performance has been like, cash is perhaps not the best place to invest over the long term, as although your capital is secure, its real value will be slowly be eaten away by inflation. In contrast, we believe the best time to buy equities for the long term is often when markets have been through a tough patch."
Although these vouchers provide a good platform for children as they get older, parents, family and friends can top up the fund by another £1,200 a year in total, which will make a big difference to the amount the child will have to play with when he or she reaches 18.
Mr Hollands said: “With the minimum £500 - £250 at birth and £250 at age seven - invested, a 6 per cent compound growth rate would see the tax-free fund rise in value to £1,246.88 by the child's 18th birthday. But assuming the same rate of growth, the maximum contribution - £1,200 a year or £100 a month on top of the Government's £500 - could produce a fund of £40,175.88 - enough to help see the child through a university education.
“It's no secret that stock market performance in the last few years has been volatile, but the beauty of the CTF is the length of its investment horizon. Even for those turning seven this year, there are still 11 years until their fund matures, which should hopefully be long enough to ride out any lumps and bumps in share values.”
But whatever choice is made, parents should ensure they do not sit on their hands, as the sooner the money is invested, the more likely their children are to generate a decent fund for them to use for whatever they wish when they reach 18.
Ms Baker added: "We believe the amount of choice in CTF products is one of the greatest causes of inaction because some parents are confused and scared of doing the wrong thing. Parents are presented with so many CTF options at a time when their main priority is looking after a newborn baby and it is easy for Child Trust Funds to be put to the bottom of the priority list until the voucher expires. We believe that HMRC can help by removing the burden of choice and promoting the stakeholder account as the default option for parents, while retaining non-stakeholder alternatives for those who are more certain.
"CTFs can have a real and positive impact on social mobility, but only if parents are encouraged to engage with the scheme from the birth of their child and simplicity is the key to this."
Mr Hollands added: "While it's nice for the kids to have this autumn windfall in the shape of the vouchers that are about to arrive, the real measure of long-term success for Child Trust Funds will be the extent to which they are topped up, rather than the size of taxpayer handouts, as that will be the ultimate proof as to whether the nation's savings habits have changed."
Seven things to bear in mind as seven-year olds get CTF windfall
- It's a good time to review your CTF strategy. Don't forget you can switch from one provider to another if you want - many parents are unaware of this.
- Don't be disheartened by recent equity market performance. Investing in shares still offers the best growth potential over the long term, although there will be ups and downs along the way.
- Don't assume stakeholder CTFs are the lowest-cost option. While in theory 1.5 per cent a year is the maximum a stakeholder account can charge, in practice most charge exactly that. Investment trusts can offer active management at a fraction of the cost.
- The world is your oyster. Many stakeholder accounts stick to tracking an index of UK shares, but the UK is only a modest proportion of global stock markets. Many other markets, while perhaps more risky, have superior growth potential, or you could ensure you have all bases covered with a diversified global investment trust.
- Although cash might seem the safest option in these volatile times given that your capital is secure, the returns on offer tend to be poor. Interest rates are at a 300-year low and inflation - which is unlikely to stay in negative territory for too long - will eat away at the value of your fund over time.
- Don't forget those children over seven who have missed out on the Government's generosity. There are other children's savings plans available offering the same breadth of investment choice as a CTF, and with greater flexibility.
- While inducements such as gift vouchers might look good at the point of opening a CTF, don't let them blind you to the real value of the investment. A good choice could make you much more than the value of a free piggy bank over the long term.
Source: F&C
