As the first child trust funds reach maturity, Dewi John examines where the initiative went wrong
For anyone who may need a recap on child trust funds (CTF), they were tax-free savings products available to those born between 2002 and 2011, launched in April 2005 to promote long-term saving. HM Revenue and Customs put in between £250 and £500 to each participant, in the form of vouchers sent to parents as opening payments, to incentivise further contributions. Higher contributions were made to children from lower-income families, in an attempt to encourage them to save. This new cohort of junior savers could then look forward to
a financial boost when they reached 18, at which time they could access
their accounts.
The first tranche of CTFs matures in September 2020 and an estimated 800,000 accounts are due to come of age each year during the coming years.
Despite the intention to skew these to lower-income families, says Kerry Nelson, managing director of Nexus IFAs, “in general, it was the same people benefiting from them as with other savings products – middle-class affluent families with surplus cash”.
What’s more, it did not catalyse a savings habit, as “most people banked the original sum and haven’t tended or added to them”. Indeed, it has been estimated that as many as one in six accounts have been lost, through change of address or other circumstances leading to providers losing contact with their owners.
Relative child poverty, after housing costs, stood at 29% when CTFs were introduced, and had risen to 30% by the end of the last decade.
Options
Parents could choose between three types of CTF:
- Cash: similar to cash Isas, and with low returns.
- Stakeholder child trust funds: stock market investments, with charges capped at 1.5%, and a relatively limited range of investment options.
- Shares-based CTFs: potentially higher charges but greater choice of investment funds, or the ability to select your own securities.
In May 2010, then chancellor George Osborne announced that CTF top-up payments would stop in August 2010, with no new payments for newborns by the end of 2010. CTFs were replaced by the new Junior Isa (Jisa) in November 2011. Figures from Hymans & Robertson in 2012 showed that CTFs had £6bn of assets under management (AUM), spread over about 6.3 million accounts, across about 70 approved providers.
The demise of the CTF was on the cards even before Mr Osborne’s announcement, believes Ms Nelson, as the investment industry had never got behind the product: “Providers looked at the limited AUM and didn’t see it as worth their while,” she says. “But it would have been easy to tack them onto existing wraps and platforms, to make them more accessible to investors.”
While there was some support for rolling CTFs into the new Jisa, the latter simply replaced the former, and CTFs were left to, in effect, gather dust.
The shift to Jisas had obvious advantages: there is a wider choice available, with greater investment flexibility and, not least, lower charges. CTF investors could expect to pay annual fees of 1.5% for a stakeholder CTF, and more for a shares-based one, as opposed to 0.5%-1% for a Jisa. That said, given fee compression throughout the investment and savings market, had CTFs stayed the course, their fees would likely have been reduced
over time.
Ms Nelson adds that the limited investment opportunities for CTFs had always held them back: “As a relatively long-term vehicle, the CTFs could have taken on more risk, with the potential to deliver a reasonable sum at the end of the investment period. As it stands, many will have struggled to beat inflation.”
Incentive
The main difference between Jisas and CTFs was the initial financial incentive. Whether or not persisting with this would have worked in creating the savings culture – and in doing so, a route out of poverty for many – seems unlikely: not even CTFs’ most ardent supporters would have ever claimed that this could be achieved by one product.
What is not beyond doubt is that neither CTFs, Jisas or anything else have shifted the dial on child poverty. Relative child poverty, after housing costs, stood at 29% when CTFs were introduced, dipped to 27% in their final year (2011), and had risen to 30% by the end of the last decade. The situation is particularly topical, given UK Prime Minister Boris Johnson’s ticking off from statistics bodies after making a series of “inaccurate” claims about child poverty to parliament in July.
Ultimately, Ms Nelson sees CTFs as a lost opportunity: “They could have been a great tool to engage a wider community and to help younger people understand finances,” she says, “but the opportunity was neglected by both government and providers.”
Dewi John is a freelance journalist
