As the government scraps Child Trust Funds, we round up what this means for parents.

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By Jonathan Thomas
Know Your Money Editor

The government has announced that Child Trust Funds (CTFs) are to be scrapped. Under the current system, parents of newborn children are given a minimum £250 voucher to invest for their children, who are then given access to the money saved up for them when they reach the age of 18.

Savings of £320 million in 2010/11 are hoped to be achieved by calling a halt to the scheme, a figure that is set to rise to £520 million in 2011/12.

At present,1.4 million parents, relatives and friends are contributing money to accounts with more than £22 million being added every month.

CTFs have a significantly higher uptake than pensions and ISAs, with close to three-quarters of parents opting to be proactive about opening one for their child.

Statistics show the average direct debit payment currently made by parents into CTFs held with The Children's Mutual is £24.

Parents who maintained this level of monthly payment across the life of the account would find their child received £9,750 lump sum when they turned 18.

The move has received a mixed response and many current and prospective parents may be wondering how the decision will impact their finances and what the best course of action to take is.

When will they stop?

The cancellation of CTFs will come into action from January 2011, with all contributions from birth stopped from then.

From this August, contributions will be reduced for newborns and stopped at the age of seven.

Explaining the decision, the Treasury said that at present the CTF is based on the assertion that young people will be able to build up funds that they can use later in life.

However, it stated that as government payments into the scheme are funded by public borrowing, the government is also storing up debts that will have to be repaid by the same young people.

Commenting on the decision, Tom Nichols, press and parliamentary officer for Child Poverty Action Group - a charity campaigning for the abolition of child poverty in the UK - said: "We have always thought that the resources would have been better channelled directly to the families' material needs.

"The resources that were put in will be missed but we had always said that the resources should be re-directed and that's not what has happened. They have simply been cut."

He added it is really difficult to tell what impact CTFs will have because it will not be made completely clear until the children that have qualified for them reach 18 and people are made aware of the impact that it has on their lives.

What happens to those with them?

The Children's Mutual acted quickly to reassure the five million families whose children hold CTF accounts they will be able to continue using the funds to save for their offspring, as the accounts will still run until their child's 18th birthday. It urged parents to make the most of the tax-free investment growth of the scheme.

David White, chief executive of The Children's Mutual, said: "The CTF has changed the nation's savings habits and we congratulate families across the UK for recognising the critical importance of saving for their children's futures."

He also expressed his disappointment about the scheme coming to an end and encouraged families to continue saving regularly to aid their children's future. "CTF holding children now hold a unique asset that others will not," he suggested.

The Share Centre pointed out that children - aged up to eight years old - who are lucky enough to have a CTF when they are cancelled will be able to keep it and receive an additional £1,200 per year from the contributions of family and friends.

The news is less positive for newborns as once the legislation has been passed, no tax - free savings can be made for them until they reach the age 16, when they can open an ISA.

However, research from Unbiased.co.uk revealed just over two thirds - 71 per cent - of eligible children have had a CTF account opened for them, yet just under a quarter - 24 per cent - of those set up since 2005 have recorded additional deposits.

In addition, just one per cent received maximum funding. Research found that if just half of the accounts that were given no extra funding had been topped up to the maximum amount, the overall additional tax saving would equate to £18 million.

Karen Barrett, chief executive of the company, suggested that parents may be wise to seek financial advice in order to determine the best way of ensuring their child has adequate savings.

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