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Find out from ASDA about changes to the Child Trust Fund scheme

Your Child Trust Fund questions answered.

Child Trust Funds - what now?

New Child Trust Funds are to be axed – as the UK’s coalition Government seeks to tackle the country’s budget deficit.

But what does this mean for babies born later this year, or for families saving into existing Child Trust Fund Accounts?

What are the planned changes for Child Trust Funds?

The coalition plans to introduce legislation cutting the money children receive at birth from £250 to £50 from August 1, with children from lower-income households receiving £100, down from £500 previously.

Children will no longer receive an additional payment when they are seven, from August 1.

All Government payments will be stopped from the beginning of next year, following the introduction of further legislation. So for children born from January 1 2011, no new Child Trust Fund accounts can be set up.

The Treasury says it will continue to make additional contributions to existing accounts held by disabled children this year, but from 2011/12 the money will be redirected to provide respite care instead.

What about existing Child Trust Fund Accounts?

The Child Trust Fund scheme was introduced by the previous government to encourage parents to save on behalf of their children and to ensure all children had a financial asset when they reached 18. Money could be invested as cash savings, or into other assets such as collective funds investing in company shares.

Children born on and after September 1, 2002, received a government voucher to open a CTF account. Friends and family can save £1,200 into an account each year between them, and all investment growth is tax efficient.

Children received a further government contribution when they turned seven. Under the changes, children who aren’t seven by August 1, 2010, won’t now get this additional payment.

But their Child Trust Fund accounts will continue to operate as they have been doing. Up to £1,200 can still be invested each year, and growth earned on the account will remain shielded from personal taxes.

The value of the account cannot be withdrawn until the child’s 18th birthday.

Why is the Child Trust Fund Account being scrapped?

Stopping Child Trust Funds is predicted to save the Government about £520m a year. The Treasury said Government payments to the accounts are being funded by public borrowing – and so will store up debts which will have to be repaid by taxpayers.

Were Child Trust Fund Accounts a success?

More than five million child trust fund vouchers have been issued since the scheme was first launched in April 2005. Figures from HM Revenue & Customs show 3.7 million Child Trust Fund accounts had been opened by parents by March 31, 2010.

If parents fail to open a CTF on behalf of their child within 12 months of receiving the voucher, a stakeholder version of the account is automatically opened for them.

Supporters of the scheme say the funds encouraged parents to save for their children. Asda provides access to a Child Trust Fund Account with The Children’s Mutual. Research by the provider showed fewer than one in five parents saved for their children before Child Trust Funds were launched, but this rose to three in five following the introduction of the scheme.

The Children’s Mutual found parents who make regular contributions to the funds pay in an average of £24 a month, which could produce a fund worth around £9,750 when their child turned 18, at an assumed growth rate of 7% a year.

What are the alternatives to a Child Trust Fund?

Parents can pay into straightforward savings deposit accounts, National Savings baby bonds, regular-payment investment trust accounts, OEICs and unit-trust schemes.

For some types of plan you may need to complete a form to ensure your child does not pay tax on interest or investment growth. There is also no contribution from the Government into these products.

The financial services industry has suggested that ISAs could be launched for children, or Child Trust Fund accounts could continue to be set up from 2011, but without the Government’s contribution. However, such proposals would require the support of Parliament before they could happen.