Cameron & Clegg plan to take money from babies

As the new government threatens serious cutbacks, your children look set to lose out.

As the new government sets off on a huge cost cutting exercise, children are going to be among the many victims. The Government announced today that Child Trust Funds (CTFs) will be scrapped, with payments due to be cut sharply from August in the build-up to a full withdrawal of payments by January.

The Child Trust Fund initiative, launched in 2005 by the Labour Party, currently gives every child born on or after 1 September 2002 a free voucher worth £250 - or £500 for lower income families - which can be invested in a CTF account tax-free. A further top-up of the same amount is paid on the child’s seventh birthday - again, this top-up payment will be scrapped from 1 August.

The aim of the scheme was to give parents a head start in saving for their children’s futures, with the opportunity to add to the CTF themselves up to a maximum of £1,200 a year until the account matures when the child reaches 18.

Wave goodbye to Child Trust Funds

But no longer. Even before the election, the Liberal Democrat manifesto stated an intention to abolish Child Trust Funds completely, while the Conservatives were leaning towards limiting new CTFs to children from lower income families only.

Now the parties have agreed that “from August, payments at birth will be reduced from £250 to £50 for better off families, and £500 to £100 for lower income families; and payments at age seven stopped. Additional payments for disabled children will be paid this year."

Payments to everyone - including lower income families and disabled children - will be stopped from 1 January 2011. (From 2011-12, the money used for the additional contributions for disabled children will be redirected to respite care for disabled children.)

Does restricting Child Trust Funds make sense?

Clearly, the coalition is intent on narrowing the deficit as quickly it can. But according to CTF provider Family Investments, the scheme is relatively inexpensive anyway, costing around £500m a year in government contributions.

Additionally, the scheme was proving successful in its objective to encourage a positive savings culture. In fact, one third of parents now regularly save on their children’s behalf compared with just one fifth before CTFs were launched. Scrapping CTFs now could undermine all that they have achieved so far.

Remember, the whole point of CTFs was to persuade parents, grandparents and others to save on behalf of children with a view to financing things like further education or buying a home in the future - partly because these costs are only set to rise in the long-term.

Will parents be less keen to save long-term for their children due to the scrappage of the scheme? Only time will tell...

In the meantime, if you've just had a baby and you have already got a voucher, you should be OK. If your baby is due in May, June or July, be sure to try to register for Child Benefit before 1 August so you get a £250 voucher instead of the £50 you'll get in August.

Child Tax Credit

In addition to the inevitable CTF changes, it looks like Child Tax Credit will also become less generous, and will be reduced specifically for higher earners.

Child Tax Credit is paid to families who are responsible for at least one child (or a qualifying young person). The basic benefit - known as the ‘family element’ - is worth £545 a year or £1,090 if you have a baby under one. If you’re on a low income, you’ll be entitled to an additional amount of up to £2,235 a year for each child, with extra benefits if your child is disabled.

Child Tax Credit is applied on a sliding scale which means the actual amount you’ll receive depends on your income and circumstances. But, under the current rules, you can still qualify for payments even if you have relatively high gross earnings of up to £58,000.

Once again it’s unclear exactly what changes will be implemented, but it’s understood that Child Tax Credit will be scrapped if you earn more than £50,000, although those with a household income above £40,000 may also be affected by the new rules.

Don’t miss these free guides on investing for your children.

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