Cut costs and scrap tax relief on other children's savings but keep Child Trust Funds universal

22 May 2010

A think-tank has today warned the coalition Government against scrapping universal Child Trust Funds, arguing that the policy can be made to work better for much less money, and proposing a package of measures to do so, including scrapping tax relief on all other children's savings.

The Social Market Foundation argues that the cost of the scheme could be reduced by two-thirds by cutting the value of the CTF voucher given to each child at birth from £250 to £50 and scrapping the second contribution that is currently paid on a child's seventh birthday.

To better encourage saving in the CTF, the government should match families' contributions up to £50 per year up to age 5 funded by axing tax relief on all non-CTF children's savings.

The SMF argues that with reform, Child Trust Funds can achieve important policy objectives for the government widening financial engagement particularly amongst the less well paid, encouraging saving and giving all young people a financial stake in the future.

The think-tank says that in contrast, other children's savings accounts, which benefit from tax-relief, are typically used by wealthier households to shelter their savings from the taxman: government figures show that half of all children do not have any financial assets of their own.

The proposal from the Social Market Foundation is one of a number of recommendations set out in a new paper mapping the future of Child Trust Funds.

The Coalition Agreement says the new Government will "reduce spending on the Child Trust Fund and tax credits for higher earners". The SMF argues that this approach may not prove to be viable as the accounts currently work because of the money invested in them by higher earners. Without participation from the better off annual account management charges would be loaded on to those who save the least.

Commenting SMF Director Ian Mulheirn said:

"Government has to reduce spending. Our proposals allow Child Trust Funds to continue, to work better and for costs to be reduced by two thirds. Limiting CTFs to the least well off may render them financially unviable. Keeping tax relief on other children's savings whilst drastically cutting the CTF scheme only benefits children from better-off families at the expense of the rest."

Notes for Editors

Child Trust Funds, where all children are given a £250 voucher at birth to invest in a savings account were launched in 2002, to provide all children with a cash asset aged 18 and to encourage financial engagement of parents and later children.

To cut the annual cost of the Child Trust Fund policy, the SMF says the government should:

  • Abolish universal CTF payments for seven year olds, saving £218.5 million;
  • Reduce the value of universal payments at birth to £50, and the value of additional awards for lower-income households to £200, saving £153 million;
  • Abolish tax-relief on non-CTF children's savings accounts for under-16s, saving the Exchequer £181.4 million, and recycle this saving to fund the cost of CTFs.

To improve saving rates and active engagement with Child Trust Funds (CTFs) among lower-income households, the government should:

  • Simplify choices around opening a CTF account;
  • Develop behavioural interventions, such as direct-debit schemes;
  • Impose restrictions on how Child Trust Funds can be used at the age of 18;
  • Make receipt of full voucher entitlements among low-income households conditional on using financial advice;
  • Strengthen the role of the CTF in citizenship policy;
  • Implement matching contributions for low-income households up to £50 each year for the first five years of a child's life, at a cost of £165 million per annum.

The SMF estimates that these proposals, which would increase the effectiveness of the Child Trust Fund policy but reduce its cost to the Exchequer, would see the annual cost of the policy totalling around £150 million. 

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