Should Child Trust Funds be restricted to the poorest parents?

Should Child Trust Funds be abolished, or restricted to children from lower income families as David Cameron is suggesting?   If the latest figures from the tax man are anything to go by, a substantial minority of parents are totally disinterested. 

One of the most astonishing figures to come out of a government department is that more than a quarter of all parents who receive Child Trust Fund vouchers on the birth of a new baby fail to invest the money within a year.  These are substantial sums of money - £250 or £500 depending on whether the child’s parents are on low incomes or claiming benefits.

Clearly, some parents are either so wealthy that another £250 is neither here nor there, or so feckless that they allow these vouchers to lie idle when they could be invested and earning a return for their infant child.

The fund managers who have everything to gain from the continuation of universal CTFs are, unsurprisingly, presenting the statistics as a triumph.  ‘Nearly three quarters of all Child Trust Funds (CTFs) are proactively opened within a year of a child's birth,’ says a report from The Children’s Mutual.  And it claims that ‘this figure only tells part of the story of parents' engagement with saving for their children.’

It is certainly good news that around 75% of parents do open a CTF for their child.  But The Children’s Mutual claims that those who don’t and allow the government to invest the money by default, do so because they don’t feel sufficiently well informed to make a choice – not because they are totally apathetic.

‘What is impressive is that nearly 75% of parents choose to proactively open the account and around half of our customers start saving on a monthly basis immediately,’ explains David White, chief executive of The Children's Mutual.  But those saving in addition to the vouchers are likely to be parents and grandparents who would save for their children anyway.

The company’s research shows that over one in 10 parents actively choose not to open an account and to let the government do so on their behalf, citing their lack of familiarity with financial matters.  In addition, research among parents who haven't opened accounts found that 27% say it is because they haven't had time to think about it.

White makes the point that ‘engaging 85% of the population to do anything is phenomenal when you consider that when it comes to matters financial just 40% of the adult population has a private pension and only 30% of those eligible have an ISA.’ 

However, first of all not all adults have children so it isn’t 80% of the population and secondly, the reason why a large proportion of individuals do not save in a pension or an ISA is because they can’t afford to do so.  With a CTF the parent only has to invest the voucher – not put up any money themselves.  And it is shocking that some 25% of parents either forget to do so or can’t be bothered.  

Meanwhile, Family Investments, another big CTF beneficiary, is claiming that the official figures from Her Majesty’s Revenue & Customs show a rise in the number of parents opening CTF accounts within a year of receiving the vouchers – when in fact the proportion has fallen.

‘The latest HMRC figures show that 71% of all parents opened a CTF within the first year of their child's birth,’ commented John Reeve, chief executive of Family Investments.  This is true for CTF vouchers issued in July to September 2008, but this fell to 70% in the October to December quarter of 2008, now a year ago, and 60% in the January to March quarter of 2009.

Reeve claims that, ‘this shows that the initial Government CTF voucher is an effective way to encourage parents to take the first steps to save for their children's future.  The success of the CTF is engagement and the government top up is a key factor in driving this.’