George Ladds, head of savings and investments research at Fair Investment Company comments on The Children's Mutual's decision to stop taking new business to all but its most basic Child Trust Fund Account and urges the Government to offer alternative options:
"It is understandable that The Children's Mutual has taken the decision to temporarily suspend accepting new savings business following the news that the Child Trust Fund (CTF) is to be scrapped. It appears companies like Children’s Mutual saw CTFs as a major part of their business model, and now, with the reduced value of the vouchers – down from £250 to £50 and from £500 to £100 for children from low income families from August, and then scrapped completely from January 2011 – the accounts will be of even lower value than they are currently, making it commercially unviable for many providers to continue to offer them.
"There are still plenty of other providers offering CTFs, such as Engage, Family Investments and Jump; it will be interesting to see how many of these companies follow Children’s Mutual. What raises concerns is that these companies may have become over reliant on one stream of business and now that CTFs have been scrapped their business model may be under pressure. In reality the funds are safe for investors as they are protected under the Financial Services Compensation Scheme but if Children’s Mutual doesn’t re-open to business and others follow then performance in these funds may suffer.
"At Fair Investment we have argued that the decision to scrap CTFs was a positive step but what we really need is more options. As The Children's Mutual has said, the Government did not consult with the industry about scrapping the CTF and so far, no alternative options have been mentioned. However, rather than looking at the past perhaps we should be campaigning harder for viable alternatives which can be presented to the Government.
"This change now paves the way for a better, more modern system. For example, if you were to save your child's Child Benefit (currently around £88 a month) into a saving plan for 18 years, based on the latest official Financial Services Authority (FSA) growth estimate of 7%, your child would have a nest egg of nearly £38,000.
"But currently, the only tax-exempt savings plans for children (excluding the Child Trust Fund) are plans run by friendly societies which allow a maximum investment of just £25 a month and normally have limited fund choice, in most cases this is restricted to the with profits fund of the society.
"The charges are often unclear, and in the long term probably represent poor value for money, and when you consider that most savers no longer consider with profits as a viable investment option, you have to question why this is the only tax-efficient savings vehicle for children.
"Yes, the CTF was originally launched to encourage parents to save, but I think parents need to be given more credit – most, if they can afford to, will save for their children anyway, without being pushed by the Government, what they need is better options, not handouts from the state.
"Although scrapping the CTF has been a controversial move, I would argue the Government should go one step further and scrap the £25 a month tax-exempt plans and introducing a simple form of children's savings open to all registered providers, for example, Children's ISAs. This would enable parents / grandparents to select an investment that is right for their child / grandchild from a wider universe and still benefit from the tax efficient status of the plans.
"I believe that a simple system for saving for children, through a Children’s ISA with an allowance of £3,600 per annum, and clearing away not only the now defunct CTF but also tax-exempt plans would demonstrate the Government's commitment to encourage saving for children."