Child Trust Funds 'may come back'

Child Trust Funds could be revived in future years, despite being axed by the new coalition government, according to the man who thought them up.

Julian Le Grand, Professor of Social Policy at the London School of Economics, told BBC2's Working Lunch programme: "I think the Child Trust Fund will be reinstated, because it's such an effective instrument for raising savings."

The tax free savings plans are to be wound down by the beginning of next year, after a five year lifespan.

Any existing Child Trust Funds will continue, but newborn children will cease to qualify from January.

Professor Le Grand's original idea was for every child to be given a savings account, supercharged with a lump sum provided from inheritance tax.

The riches of the older generation would be used to build up the wealth of the younger generation.

In the event, Labour provided a £250 initial payment to each child when the funds were launched in 2005, paid from general taxation.

Another £250 followed at the age of seven, while lower income families received more.

The government announced last week that it would save £520m a year by scrapping the funds.

It argued that since government payments into the scheme were essentially being funded by public borrowing, the government was storing up debts which would have to be repaid by the same young people that the scheme was designed to benefit.

Nonetheless, Prof Le Grand, who was a Downing Street adviser under Tony Blair, said the funds had been "an enormous success".

He stated that 30% of poorer families were topping up their children's funds with extra savings.

One London mother, Siobhan Randles, plans to save £10 or £20 a month for her two-year old daughter, Marley.

Financial pressures prevented her from starting until now.

"The £250 is like a bit of reassurance and encouragement for me to save," she explains. "It does worry me that people on low incomes won't have that now and may not be able to afford to save."

Five million children have already qualified for the plans, so they will remain a significant feature of the investment world.

"The raised saving, the increased financial literacy - that will continue," forecasts Prof Le Grand. "When we come to reinstate them, as I hope we will, those benefits will carry on."

Children who already have the plans, and their parents, will face the continuing dilemma of whether to stash the money in interest-paying savings accounts, which are guaranteed, or in shares.

It is hard to read anything from the performance statistics so far, because the stock market has been on a rollercoaster ride before and after the credit crunch.

However, figures from financial information company Moneyfacts show that investments in share-based, or stakeholder plans, have held their own so far.

Stakeholders have outperformed cash savings plans in three out of the past five years, and they put on an impressive 40% in 2009-10.

Of course, what happens now is anybody's guess.

While there is no indication of a change of heart from the new chancellor, the fact is that millions of Child Trust Funds will remain growing in the background, reminding any future government that the idea continues to be an option.

And once children with funds approach the age of 18, when they can gain access to the money, there will be a stark divide among teenagers between the haves and have-nots.

Some could have a nest egg worth many thousands of pounds and others will have nothing.