Child Trust Funds to be scrapped

The coalition government has announced that it will stop all payments to Child Trust Funds by January.

Payments under the scheme will be sharply reduced from August in the build-up to its full withdrawal.

At present, parents of newborns receive a minimum £250 voucher to invest for their children. They can have access to the money from the age of 18.

A further payment is made when the child reaches the age of seven. This top-up will be scrapped from 1 August.

Chief secretary to the Treasury, David Laws, said halting these payments to newborns from the end of the year - and the top-up payments - would save £520m.

Some £320m will be saved in 2010 and 2011, rising to £520m in 2011-12.

If it has already been opened, it will continue as usual - and the child will not be able to touch the money until the age of 18.

The tax-free element will continue. No tax is paid on any income or gains in the account.

Family and friends will still be able to add up to £1,200 a year into the account.

The government will not withdraw the money it has already put in the account.

Child Trust funds were set up by the Labour government to encourage parents to save for their children.

The idea was for children to have some savings at the age of 18, to assist with costs such as university funding.

Parents, family and friends can contribute up to £1,200 a year to the account, with no tax to pay on any income or gains in the account. This money is often invested in shares.

At present, the government gives £250 in the child's first year and the same amount again when a child reaches the age of seven.

If the child is born into a family where the household income is £16,190 or less, then the initial payment is £500.

Since April 2010, a child eligible for Disability Living Allowance also gets a yearly top-up of £100, or £200 if the child has a severe disability.

"From 1 August, payments at birth will be reduced from £250 to £50 for better off families, and £500 to £100 for lower income families [household income of less than £16,190]; and payments at age seven stopped," the Treasury announced.

All payments will be stopped from 1 January 2011.

"Additional contributions for disabled children will be paid this year. From 2011-12 the money used for these additional contributions will be redirected to respite care for disabled children," it said.

Mr Laws said it was "deceiving" people if they were handed funds that were from borrowed money.

"I know that this will be a disappointment to some parents, but we need to be honest about what we are doing," he said.

"At present, the child trust fund is based on the claim that young people will build up an asset which they can use later in life.

"But since government payments into the scheme are essentially being funded by public borrowing, the government is also storing up debts which will have to be repaid by the same young people."

Three out of four parents put the voucher into accounts which are invested in shares.

However, these funds were hit by the economic downturn, although share prices have recovered somewhat since.

The decision met with some condemnation. David White, of the Children's Mutual, said he was "staggered" by the announcement.

"The Child Trust Fund is the single most successful savings policy to date and this sort of short-term cut does not address the pressing need for families to save, or recognise the significant benefit to society that the Child Trust Fund will bring from 2020 as maturing funds return an anticipated £2.96bn each year to the economy," he said.

"There is still time to reverse this decision so we will be talking to every MP across the country to help protect the Child Trust Fund for future generations."

Before the latest announcement, the Social Market Foundation think tank had urged the government not to scrap the scheme, suggesting it reform them to make them cheaper to run instead.

It said the amounts should be cut, and millions could be saved by ending tax relief on children's savings accounts that were not Child Trust Funds.

The group also suggested a series of measures to help encourage people on low incomes to save for their children.

Andrew Hagger, of financial website Moneynet, said: "It is a short sighted decision to axe a savings scheme that would have given a vital financial boost to the next generation."

He has calculated that by saving £22.50 per month on top of the two £250 payments from the state, a Child Trust Fund with growth at 4% would have been worth £7,964.70 by the time a child reached 18 years of age.

Child Trust Funds cover the whole of the UK. However, at present, children in Wales get an extra £50 at the age of seven, or £100 if they are from a low-income household. The Welsh Assembly must decide whether this continues.