Life after Child Trust Funds
As the government axes Child Trust Funds, we look at what this means for your child’s financial future and explore other savings options.
In one of the most controversial elements of its £6.25 billion worth of spending cuts, the coalition has announced Child Trust Funds (CTF) are to be scrapped.
Cuts to the savings scheme came as no surprise with both the Tories and Liberal Democrats campaigned on this premise in the election race. However, many analysts had believed some incarnation of CTFs would remain for children from poorer families.
Chief Secretary to the Treasury David Laws said the move will cut public spending by £320 million this year and £520 million the following year.
What are Child Trust Funds?
Introduced by Labour to encourage parents to save for their children’s futures CTFs provide children with a £250 voucher. The child’s guardian will then start a savings account or make tax-efficient investments on the child’s behalf.
Neither parents nor children paid tax on any growth and the money could not be withdrawn until the child’s eighteenth birthday.
What happens now?
As of August, government contributions at birth will be reduced and top up payments for seven year olds will stop. All government contributions will cease by 1 January 2011.
Despite cuts, existing CTFs will not be affected and will retain tax-free status. You can still save up to £1,200 on your child’s behalf per year with tax-free growth. However, there will no longer be any government contributions.
What are the alternatives?
There are still a number of ways for you to invest for your child. Some options include:
Savings account: You could opt to put money into a savings account. If the interest is below £100, it will be tax free. Finding an account with an attractive interest rate is crucial with inflation at 3.7 per cent.
Children’s Bonus Bonds: Issued by National Savings and Investments (NS&I), these bonds allow you to make tax-free investments for children under 16 in their own name.
Premium bonds: These are entered into a prize draw each month with the opportunity to win a tax-free sum between £50 and £1,000,000. Because your investment is backed by HM Treasury, your money is totally safe.
The bond must be held by an adult until the child turns 16.
Gilts/government bonds: By investing in a gilt, you loan money to the government to be repaid at a specific time. Your capital is secure and you receive a fixed rate of interest for the term of the gilt.
Equity funds: If you are willing to take a greater risk for potentially higher rewards, you could invest in the stock market. Because this money is likely to be invested for a number of years, this could give you time to ride the ups and downs of the market. Beware capital is not secure.
Before you commit to investments, it’s a good idea to speak to an independent financial adviser.
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