What impact will the Child Trust Fund changes have?

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By Mark Mitchell
Know Your Money Editor

Child Trust Fund payments were introduced in September 2002 to encourage parents to invest for their children via a Child Trust Fund - often in shares - for when they go on to further education or live by themselves.

But changes have been made, which may have an impact on how parents opt to save for their children.

What are the changes?

The government announced on May 24th this year that it intended to reduce and then stop government payments to Child Trust Fund accounts.

Until August 1st 2010 parents received a £250 voucher from the government to start a Child Trust Fund account for their offspring and if the child was from a lower income family the government then paid an additional £250 into the account.

However, since last weekend the voucher and additional payment will, for children born between August and December this year, each have a value of £50 or £100 for low-income families.

Children born from January 2011 onwards will not qualify for a Child Trust Fund account.

As another part of the phasing out process children will also no longer receive a top-up £250 on their seventh birthday.

This differs slightly for those in Wales as the Welsh Assembly has chosen to continue to fund a £50 top-up on this date.

Previously, parents, family and friends could then put up to £1,200 a year into the Child Trust Fund with any income or gain tax free.

This arrangement will carry on as normal for those who already have a fund, so parents who have invested vouchers are not required to take any action.

Are the changes bad news?

Some critics have argued the move is a short-sighted measure by the coalition government, but it claimed that handing people payments from public borrowing was "deceiving".

It predicts that calling the payments to a halt will save the government £320 million this year and next, rising to £520 million in 2011-12.

Figures indicate three-out-of-four parents have put their child's voucher into accounts that are invested in shares.

The Welsh Assembly has not been welcoming of the move with a spokesman stating: "It is crucial that we invest in the future of our children and young people, especially those from less well off backgrounds."

He added: "We are doing everything we can to explore ways in which our existing investment in setting up Child Trust Funds in Wales can be protected and to see what we can do to maintain our commitment to Wales' children and young people in the future."

Phil Perry, director of Ark Financial Planning, was not as concerned about the impact the changes will have and stated 250 is not an awful lot of money and commenting on the phasing out process asked "what can you do with £50?".

He suggested £50 as a one-off payment is not worth the paper it is written on.

He added: "I don't think it is particularly going to hit anybody. It was just an incentive to try and get people understanding that you should save for your children.

"I don't think a lot of people took the right route where Child Trust Funds were concerned. If you looked at how many people have got that money invested in cash we would probably be quite surprised; people didn't seek advice for it."

What to do next?

From 2011 a new pupil premium to raise achievement among disadvantaged children will begin.

As set out in the coalition government document, the new pupil premium aims to provide additional funding for more disadvantaged pupils to ensure they are given the same opportunities as young people from richer families.

People that would like to make savings for a child due next year may wish to receive some of our brochures about saving for their offspring, which can be obtained here.

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