Four million savings accounts at risk!

Over four million children have a Child Trust Fund. Alas, with the nation's finances in a complete mess, these savings accounts could soon be axed...

Before being promoted from Chancellor to Prime Minister, Gordon Brown launched the Child Trust Fund (CTF) in 2005. His admirable aim was to provide a windfall for children, while teaching them (and their parents) about the virtues of long-term saving and investing.

All babies born after 31 August 2002 receive a voucher of £250 at birth, which is doubled to £500 for those in low-income families. A second payment of £250 is made after the child's seventh birthday, so the first top-ups are on their way this month. In addition, up to £1,200 a year can be added to a CTF by family or friends. This money can be saved as cash, or invested in stock-market funds or shares.

In short, the CTF is an attractive tax shelter for children -- and one which cannot be touched until age 18. What's more, with 791,000 babies born in the UK last year, more than 4.4 million CTFs have been opened to date, containing more than £2 billion.

But not everyone's a fan of CTFs. After all, you could argue that the government is simply recycling tax revenues back to parents while creating yet more layers of bureaucracy in-between!

Whatever your view, CTFs do seem to have been relatively successful, and there was never any question of them being axed....

CTFs under attack

...until, earlier this month, respected think-tank the Institute for Fiscal Studies (IFS) warned that the urgent need to curb government borrowing could sound the death knell for CTFs. Instead of slashing essential services, killing off CTFs could save £500 million a year.

The following week, the chancellor, Alistair Darling, defended CTFs and the role they play in promoting the savings habit to children. However, at the Liberal Democrat party conference, leader Nick Clegg yesterday warned that the UK must slash non-essential public spending in order to support key services. Here's what Mr Clegg said:

"We do need to make bold, serious, difficult decisions about where we can get that money, because it doesn't grow on trees. That's why we have said instead of spending half a billion pounds a year on the government's Child Trust Fund...we should cut that totally in order to provide money where it's really needed."

Our government's spending is set to exceed its income by perhaps £200 billion in 2009/10, which comes to around £8,000 per household. Hence, the UK is terrifically strapped for cash, so the government faces some tough decisions. Can it really afford to borrow today in order to provide jam tomorrow for our nation's children?

It's all very well giving children substantial presents at birth and age seven, but it seems silly to slap these on credit. Faced with similar hardship, sensible parents would do the right thing and make cutbacks in order to survive. Given that cuts to the benefits and tax credits paid to parents would hit children much harder, axing CTFs is clearly a lesser evil.

Alternatives to a CTF

At home, I have two children born on opposite sides of the CTF divide.

My daughter (born in 2003) has a self-select shares CTF into which I've put her initial voucher of £268, plus four deposits of £1,200. Today, her fund is worth around £500 less than the £5,068 paid in, but she has at least twelve more years for this to come good.

Alas, my son (born in 2001) is too old to qualify for a CTF, so I've made alternative arrangements for him. He has a children's savings account into which cash gifts go, plus a bare trust inside which I've bought units of Fidelity Moneybuilder UK Index, the UK's lowest-charging index-tracker fund.

Of course, I worry about what my children might do with, say, a £40,000 nest egg at age 18, which is why I've concentrated on an investment which they cannot touch until age 55. That's right: my little ones each have their own pension, into which I deposit £3,600 a year.

Even though my offspring don't pay tax, they still get tax relief on these pension contributions. Hence, to deposit £3,600 into their pensions, I need only pay in £2,880 a year. The other £720 is a yearly gift from the government, which is much better than £250 into a CTF!

In summary, there's a fair chance that CTFs could be scrapped in order to maintain more vital public services. Hence, my advice to worried parents and guardians is to sock away as much as you can into a child's CTF before they are withdrawn. Also, look into alternatives to CTFs, such as Best Buy children's savings accounts, stock-market funds and pensions for children.

Finally, here's a money-management message for Gordon Brown and Alistair Darling which I often given say to my children: "Remember that you can only spend it once"!

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