Almost one million eligible parents have failed to open a
child trust fund (CTF) for their offspring.
New government figures show that 4.01 million CTF accounts have been opened since their introduction in April 2005, but just 3.07 million of these were actively opened by parents themselves.
The remaining vouchers were automatically transferred into a cash account by the government.
Tax-free gainsThe
CTF is a government initiative designed to get parents saving by offering all children a tax-free £250 voucher that can be invested on their behalf, followed by a second £250 voucher at the age of seven.
Children from lower-income households receive an additional £250 top-up at both stages.
Parents can choose from either a cash or stakeholder option. The account can be topped up to a maximum of £1,200 a year, with all gains tax free, and will be paid out when the child turns 18.
Cash loses to stakeholderThe significance of CTFs not opened by parents being dumped into a cash account is that it is almost certain to under-perform against the stakeholder option in the long run.
And while many parents will be questioning the wisdom of being exposed to the stock market during these volatile times,
CTF provider Sheffield Mutual Friendly believes now is actually a great time to increase investment in your stakeholder CTF.
“Equity markets are currently priced at the lowest levels we have seen them for several years making now the best, not the worst, time to be buying units through a stakeholder scheme,” says Sheffield Mutual Friendly CEO Andrew Townsley.
Confusion causing inactonInterestingly, the high number of parents failing to open a
CTF is not due to a lack of awareness, with a recent government survey finding that 97% of eligible parents know of the initiative.
Rather, CTF provider Family Investments believes the high levels of inaction are a result of confusion caused by having to choose between two different types of account.
In order to simplify the process, the provider is calling on the government to scrap the cash option altogether, given that it is likely to produce lower returns.
"The fundamental problem is that the scheme is too complex to educate the less financially engaged, or to motivate the apathetic,” says Family Investments savings head Kate Baker.
“There is a need to simplify the scheme so that there is only one clear option, the stakeholder account. Cash accounts have no real benefit and are almost certain to underperform stakeholder products in the long-term.”
Importance of avoiding chargesIf you are looking to take out a
stakeholder CTF, it’s essential you factor in the impact of charges, which can vary significantly from one provider to the next.
Let’s assume you have two separate CTF plans, one which charges 0.5% and one which charges 1.5%. To allow for a fair comparison, we will also assume both secure the same rate of growth in their investments of 7% a year, and that you save the maximum £1,200 a year.
After 18 years, the lower-charge plan will deliver a payout of £40,883 compared with the higher-charge plan’s £36,767.
