Child Trust Funds will be axed by January along with £6.2billion in public spending cuts.
Chancellor George Osborne has announced his plans this morning in a pre-budget announcement ahead of the official budget on June 6.
Scrapping the Child Trust Fund is expected to save the government £320 million this year, rising to £520 million next year. The Labour scheme, which has been criticised for being costly and unnecessary, offers newborns £250 followed by another £250 aged seven - to be saved until they’re 18. Payments are doubled for low income families.
It will be phased out this year with contributions being stopped at the age of seven from August, and all contributions from birth to end in January 2011.
Originally it was thought that the funds would be kept for low income families but the Chancellor said the decision to axe CTFs was not an easy choice but described it as 'necessary’.
"I know that this will be a disappointment to some parents, but we must be honest about what we are doing," he said.
"At present the Child Trust Fund is based on the claim that young people will build up an asset which they can use later in life. But since Government payments into this scheme are being funded by public borrowing, the Government is also storing up debts which will have to be re-paid by these same young people.”
George Ladds, head of investments and pensions research at Fair Investment Company has praised the government for committing to spend their money elsewhere: "As a middle earner and father of two children, one (born in 2000) who is not eligible for the Child Trust Fund, and the other (born in 2003) who is, I have always found them to be an odd concept.
"Firstly, the assumption that as parents we are incapable of saving for our children without funding from the state is slightly insulting. Those who can afford to save, will and shouldn't be getting handouts to do so. While those who can't afford to save have much bigger things to worry about, like paying bills, than which Child Trust Fund to save their child's voucher into – this is money they could do with now, not in 18 years time.
"However, although I am not in support of the government giving children money with which to save, I hope that in scrapping of the Child trust Fund, that the saving is well spent and that children's saving is not completely forgotten; there should be some review of savings vehicles available for children, because the current offering is antiquated and doesn’t reflect the modern world."
Among the bigger savings for this financial year were £683 million at the Department for Transport, £780 million at Communities and Local Government, £836 million at Business, £670 million at Education and £325 million Department for Justice.
There will also be a civil service recruitment freeze, as well as cuts to IT programmes, property and quangos. And Ministers will no longer have dedicated ministerial cars and will be expected to walk, use public transport or pooled cars.
The Chancellor said the cuts would help take ‘urgent action’ in reducing the budget deficit: “To boost confidence in the economy and protect jobs. To show the world that we can live within our means.
“We need to tackle the deficit so that our debt repayments don't spiral out of control. The more we do now, the more we can spend on the things that really matter in the years ahead.”
Alongside the cuts funding for Sure Start Centres and 16-19 education spending has been protected and the Chancellor has promised to reinvest the savings made elsewhere into the frontline sectors such as education, health, defence and international development.
© Fair Investment Company Ltd