Child Trust funds to be scrapped

The coalition government has announced that it will stop all payments to Child Trust Funds in a bid to save £320m as part of £6bn of cuts aimed at tackling Britain’s deficit.

Payments into these schemes will drop from August 1 when the money children receive at birth will fall from £250 to £50. For children from lower income households the money will fall from £500 to £100.

The Treasury said it would continue to make additional contributions to disabled children this year, but from 2011/12 the money would be redirected to provide respite care for them. All payments into CTFs will be stopped from the beginning of 2011.

The schemes were introduced by the previous government to encourage parents to save for their children. They were launched for children born on or after September 1 2002, and as well as receiving the Government vouchers, parents, friends and relatives were able to save up to £1,200 a year into the funds.

However, the scheme failed to be as successful as first hoped in encouraging parents to save with a quarter of new parents failing to open an account for their child in the first four years of the scheme.

Chancellor George Osborne and his Liberal Democrat deputy at the Treasury, David Laws made the announcement. Mr Laws said it was a “deception” to suggest young people were being made richer by the scheme.

He said: “I know that this will be a disappointment to some parents but we need to be honest about what we are doing. By ending payments into this scheme, we will also save the £5m annual cost of administering it.”

But Martin Shaw, chief executive of the Association of Financial Mutuals, said: “Not only does it send out a message that the current government is uninterested in incentivising families to save for their children and is at odds with the Conservatives commitment to restoring our saving culture, but it also takes away a valuable educational tool for children who are learning about the importance of saving money.

“The Government is banking on the fact that the 4m plus existing policy holders of CTFs are under seven years old and it is unlikely to cost votes but what they are forgetting is without the CTF or an adequate replacement, many families will struggle to provide their children with the financial support they need once they begin to reach adulthood.”

He also made the point that the decision to scrap CTFs would “seriously affect the businesses of companies whose prime objective is to act as a vehicle to help children save and hundreds of jobs across the mutual sector will be a direct casualty.”

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 per cent would have been worth £7,964.70 by the time a child reached 18 years of age.

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