One Child Trust Fund (CTF) provider is calling on the government to scrap the cash account CTF altogether.
Family Investments says the cash option is “almost certain” to underperform the stakeholder products in the long term. Furthermore, the fact that parents are forced to choose between different types of accounts complicates the process and deters some parents from applying, it says.
The 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.
The account can be topped up to a maximum of £1,200 a year and will be paid out when the child turns 18.
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One in four don’t act
Recent government statistics show that, although 97% of eligible parents are aware of the CTF, only 74% continue to open accounts for their children.
Those who do not act have their voucher automatically transferred into a cash account by the government.
"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.”
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Free gifts, shorter deadline
Family Investments also wants to see the government incentivising parents to take up the CTF offer early by offering a gift or bonus.
Finally, it is calling on the government to consider shortening the deadline for opening the account to three months.
“We believe that this will make a significant difference to the amount of accounts open to parents,” says Baker.
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Importance of avoiding charges
If 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.
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