Child Trust Fund
Encyclopedia
A Child Trust Fund is a long-term savings or investment account for children in the United Kingdom
. New accounts cannot be created but existing accounts can receive new money. They have been replaced by Junior ISA
s.
The UK Government introduced the Child Trust Fund with the aim of ensuring every child has savings at the age of 18, helping children get into the habit of saving whilst teaching them the benefits of saving and helping them understand personal finance
. The Child Trust Fund scheme was promised in the Labour Party
's 2001 election
manifesto, and launched in January 2005, with children born after 1 September 2002 eligible.
Eligible children received an initial subscription from the government in the form of a voucher for at least £250. In 2010/11 the child trust fund policy was expected to cost around £520m, less than 0.5% of the £84bn UK education budget. Because the scheme allows for family and friends to top up trust funds, it has given a substantial boost to savings rates, particularly among the poor. According to the Children's Mutual
, "In terms of changing people's behaviour, this is the most successful product there's ever been." For households with income of £19,000 a year, 30% of the children in that category are having £19 a month saved for them. Part of this is due to grandparents being more willing to contribute to funds, since the money cannot be diverted to the family finances. Creation of new funds and Government payments into them were ended in January 2011 by the Savings Accounts and Health in Pregnancy Grant Act 2010
.
traces its roots to Thomas Paine
, who proposed that every 21-year-old man and woman receive £15, financed from inheritance tax
. In 1989 LSE professor Julian Le Grand
proposed a similar idea, calling it a "poll grant". Subsequently the related concept of Individual Development Accounts
was developed in the United States by Bruce Ackerman
and Michael Sherraden. This approach - termed "asset-based welfare" by Sherraden - saw asset redistribution less as an egalitarian measure than as one which supported poverty reduction by encouraging saving. Sherraden argued that owning an asset led to people changing their way of thinking, being more likely to plan and invest in their future - in a way that providing people with an equivalent flow of income does not.
In the UK the idea took off in 1999/2000 with a number of contributions to the New Statesman
in 1999, including an article from Robert Reich
endorsing the idea; and support in 2000 by the influential Institute for Public Policy Research
. Sherraden's Center for Social Development collaborated with the IPPR, and a briefing paper by it remarked "It would be impossible to overstate the leadership and contributions of the Institute for Public Policy research in informing and shaping this new policy direction in the United Kingdom". This carried through into proposals being included in the Labour Party
's 2001 election
manifesto.
The Child Trust Fund scheme was promised in the Labour Party
's 2001 election
manifesto, and launched in January 2005, with children born after 1 September 2002 eligible. Over the course of the development of the policy up to implementation, it became increasingly focussed on encouraging the poor to save and to develop their financial skills, with less emphasis on the egalitarian redistribution of assets.
According to the Institute of Public Policy Research
Sherraden argued that possessing wealth in your early adulthood improves life outcomes by its effect of changing attitudes:
, but were opposed by the Liberal Democrats
in the 2005 general election
, and the Liberal Democrats remain opposed. Their policy has been criticised by Stuart White, who notes various historical examples of CTF-like policies proposed by Liberals in the past, and argues that the Child Trust Fund policy "gives direct expression to a deep, historic Liberal (and SDP) commitment to the ideal of ‘ownership for all’." He adds that "At a time of rising wealth inequality, and widespread asset poverty, the old Liberal slogan of ‘ownership for all’ has never been more urgent."
In April 2010 Julian Le Grand
argued strongly against Conservative Party plans to means test
the funds (limiting them to households on below £16,000 per year income), saying that "Confining CTFs to the poor would be divisive, and would result in low take-up and stigma. A universal endowment is a badge of citizenship." He added that if funding had to be cut from the scheme, it would be better to reduce the government's topups, and keep the scheme universal.
All of the funds in the account are exempt from income tax
and capital gains tax
, including at maturity. However, the 10% dividend tax
payable on franked income (UK share dividends) cannot be reclaimed. The UK government has stated that at age 18 it will be possible to transfer the entire CTF into an ISA to keep the tax-free status of the investment. If the CTF is withdrawn as cash, the tax benefits will be permanently lost.
If vouchers were not invested within one year of issue, HM Revenue and Customs would open a stakeholder account on behalf of the child.
Subscriptions by individuals were in addition to any voucher subscriptions.
The children of Crown servants posted abroad – including the Armed Forces
– qualify because they are treated as being in the UK.
are put into stakeholder products indicates that the government also believes equities are the best option over such a long period.
CTF funds can be transferred between providers. Rules for transfers are similar to those for Individual Savings Account
s – customers should inform the new provider they wish to use and they will undertake the move. No penalty or fee can be imposed for transferring the account, except for the cost of selling shares (such as dealing charges) in equity accounts.
George Osborne
MP and Chief Secretary to the Treasury
David Laws
MP announced that the £250 top up payments into the child trust fund would cease in August 2010, with no payments for newborns from the end of 2010. The Savings Accounts and Health in Pregnancy Grant Act 2010
facilitates the abolition of the fund.
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. New accounts cannot be created but existing accounts can receive new money. They have been replaced by Junior ISA
Individual Savings Account
An Individual Savings Account is a financial product available to residents in the United Kingdom. It is designed for the purpose of investment and savings with a favourable tax status. Money is contributed from after tax income and not subjected to income tax or capital gains tax within a holding...
s.
The UK Government introduced the Child Trust Fund with the aim of ensuring every child has savings at the age of 18, helping children get into the habit of saving whilst teaching them the benefits of saving and helping them understand personal finance
Personal finance
Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future...
. The Child Trust Fund scheme was promised in the Labour Party
Labour Party (UK)
The Labour Party is a centre-left democratic socialist party in the United Kingdom. It surpassed the Liberal Party in general elections during the early 1920s, forming minority governments under Ramsay MacDonald in 1924 and 1929-1931. The party was in a wartime coalition from 1940 to 1945, after...
's 2001 election
United Kingdom general election, 2001
The United Kingdom general election, 2001 was held on Thursday 7 June 2001 to elect 659 members to the British House of Commons. It was dubbed "the quiet landslide" by the media, as the Labour Party was re-elected with another landslide result and only suffered a net loss of 6 seats...
manifesto, and launched in January 2005, with children born after 1 September 2002 eligible.
Eligible children received an initial subscription from the government in the form of a voucher for at least £250. In 2010/11 the child trust fund policy was expected to cost around £520m, less than 0.5% of the £84bn UK education budget. Because the scheme allows for family and friends to top up trust funds, it has given a substantial boost to savings rates, particularly among the poor. According to the Children's Mutual
The Children's Mutual
The Children's Mutual is a trading name of the Tunbridge Wells Equitable Group, which includes the parent organisation Tunbridge Wells Equitable Friendly Society Limited, a mutual organisation...
, "In terms of changing people's behaviour, this is the most successful product there's ever been." For households with income of £19,000 a year, 30% of the children in that category are having £19 a month saved for them. Part of this is due to grandparents being more willing to contribute to funds, since the money cannot be diverted to the family finances. Creation of new funds and Government payments into them were ended in January 2011 by the Savings Accounts and Health in Pregnancy Grant Act 2010
Savings Accounts and Health in Pregnancy Grant Act 2010
The Savings Accounts and Health in Pregnancy Grant Act 2010 is an Act of the Parliament of the United Kingdom. It ends government support of Child Trust Funds, the Saving Gateway and the Health in Pregnancy Grant....
.
Background
Asset-based egalitarianismAsset-based egalitarianism
Asset-based egalitarianism is a form of egalitarianism which theorises that equality is possible by a redistribution of resources, usually in the form of a capital grant provided at the age of majority...
traces its roots to Thomas Paine
Thomas Paine
Thomas "Tom" Paine was an English author, pamphleteer, radical, inventor, intellectual, revolutionary, and one of the Founding Fathers of the United States...
, who proposed that every 21-year-old man and woman receive £15, financed from inheritance tax
Inheritance tax
An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate of a person who has died...
. In 1989 LSE professor Julian Le Grand
Julian Le Grand
Julian Le Grand is Richard Titmuss Professor of Social Policy at the London School of Economics and was a senior policy advisor to former Prime Minister Tony Blair....
proposed a similar idea, calling it a "poll grant". Subsequently the related concept of Individual Development Accounts
Individual Development Accounts
In the United States, an Individual Development Account is a matched savings account that enables low-income American families to save, build assets, and enter the financial mainstream...
was developed in the United States by Bruce Ackerman
Bruce Ackerman
Bruce Arnold Ackerman is an American constitutional law scholar. He is a Sterling Professor at Yale Law School and one of the most frequently cited legal academics in the United States....
and Michael Sherraden. This approach - termed "asset-based welfare" by Sherraden - saw asset redistribution less as an egalitarian measure than as one which supported poverty reduction by encouraging saving. Sherraden argued that owning an asset led to people changing their way of thinking, being more likely to plan and invest in their future - in a way that providing people with an equivalent flow of income does not.
In the UK the idea took off in 1999/2000 with a number of contributions to the New Statesman
New Statesman
New Statesman is a British centre-left political and cultural magazine published weekly in London. Founded in 1913, and connected with leading members of the Fabian Society, the magazine reached a circulation peak in the late 1960s....
in 1999, including an article from Robert Reich
Robert Reich
Robert Bernard Reich is an American political economist, professor, author, and political commentator. He served in the administrations of Presidents Gerald Ford and Jimmy Carter and was Secretary of Labor under President Bill Clinton from 1993 to 1997....
endorsing the idea; and support in 2000 by the influential Institute for Public Policy Research
Institute for Public Policy Research
The IPPR is the leading progressive think-tank in the UK. It produces research and policy ideas committed to upholding values of social justice, democratic reform and environmental sustainability. IPPR is based in London and IPPR North has branches in Newcastle and Manchester.It was founded in...
. Sherraden's Center for Social Development collaborated with the IPPR, and a briefing paper by it remarked "It would be impossible to overstate the leadership and contributions of the Institute for Public Policy research in informing and shaping this new policy direction in the United Kingdom". This carried through into proposals being included in the Labour Party
Labour Party (UK)
The Labour Party is a centre-left democratic socialist party in the United Kingdom. It surpassed the Liberal Party in general elections during the early 1920s, forming minority governments under Ramsay MacDonald in 1924 and 1929-1931. The party was in a wartime coalition from 1940 to 1945, after...
's 2001 election
United Kingdom general election, 2001
The United Kingdom general election, 2001 was held on Thursday 7 June 2001 to elect 659 members to the British House of Commons. It was dubbed "the quiet landslide" by the media, as the Labour Party was re-elected with another landslide result and only suffered a net loss of 6 seats...
manifesto.
The Child Trust Fund scheme was promised in the Labour Party
Labour Party (UK)
The Labour Party is a centre-left democratic socialist party in the United Kingdom. It surpassed the Liberal Party in general elections during the early 1920s, forming minority governments under Ramsay MacDonald in 1924 and 1929-1931. The party was in a wartime coalition from 1940 to 1945, after...
's 2001 election
United Kingdom general election, 2001
The United Kingdom general election, 2001 was held on Thursday 7 June 2001 to elect 659 members to the British House of Commons. It was dubbed "the quiet landslide" by the media, as the Labour Party was re-elected with another landslide result and only suffered a net loss of 6 seats...
manifesto, and launched in January 2005, with children born after 1 September 2002 eligible. Over the course of the development of the policy up to implementation, it became increasingly focussed on encouraging the poor to save and to develop their financial skills, with less emphasis on the egalitarian redistribution of assets.
According to the Institute of Public Policy Research
Sherraden argued that possessing wealth in your early adulthood improves life outcomes by its effect of changing attitudes:
Political opposition
Child trust funds have been broadly supported by the Conservative PartyConservative Party (UK)
The Conservative Party, formally the Conservative and Unionist Party, is a centre-right political party in the United Kingdom that adheres to the philosophies of conservatism and British unionism. It is the largest political party in the UK, and is currently the largest single party in the House...
, but were opposed by the Liberal Democrats
Liberal Democrats
The Liberal Democrats are a social liberal political party in the United Kingdom which supports constitutional and electoral reform, progressive taxation, wealth taxation, human rights laws, cultural liberalism, banking reform and civil liberties .The party was formed in 1988 by a merger of the...
in the 2005 general election
United Kingdom general election, 2005
The United Kingdom general election of 2005 was held on Thursday, 5 May 2005 to elect 646 members to the British House of Commons. The Labour Party under Tony Blair won its third consecutive victory, but with a majority of 66, reduced from 160....
, and the Liberal Democrats remain opposed. Their policy has been criticised by Stuart White, who notes various historical examples of CTF-like policies proposed by Liberals in the past, and argues that the Child Trust Fund policy "gives direct expression to a deep, historic Liberal (and SDP) commitment to the ideal of ‘ownership for all’." He adds that "At a time of rising wealth inequality, and widespread asset poverty, the old Liberal slogan of ‘ownership for all’ has never been more urgent."
In April 2010 Julian Le Grand
Julian Le Grand
Julian Le Grand is Richard Titmuss Professor of Social Policy at the London School of Economics and was a senior policy advisor to former Prime Minister Tony Blair....
argued strongly against Conservative Party plans to means test
Means test
A means test is a determination of whether an individual or family is eligible for help from the government.- Canada :In Canada means tests are used for student finance , and "welfare" . They are not generally used for primary education and secondary education which are tax-funded...
the funds (limiting them to households on below £16,000 per year income), saying that "Confining CTFs to the poor would be divisive, and would result in low take-up and stigma. A universal endowment is a badge of citizenship." He added that if funding had to be cut from the scheme, it would be better to reduce the government's topups, and keep the scheme universal.
Details
The funds are held in trust for the child until they turn 18, and the money is then theirs to use as they see fit. CTFs are managed by the parents/legal guardians of the child until the child reaches the age of 16. At this point, the child will have the option to take over management of the account including choice of provider and investment decisions. However, they will still not be able to withdraw funds from the account until reaching 18. The government has stated that they will be introducing a programme of education in personal finance in schools to enable 16-year-olds to competently manage their CTF.All of the funds in the account are exempt from income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
and capital gains tax
Capital gains tax
A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
, including at maturity. However, the 10% dividend tax
Dividend tax
A dividend tax is an income tax on dividend payments to the stockholders of a company.-Collection:In many jurisdictions, the government requires the company to withhold at least the standard tax, paying this to the national revenue authorities and paying out only the balance to the...
payable on franked income (UK share dividends) cannot be reclaimed. The UK government has stated that at age 18 it will be possible to transfer the entire CTF into an ISA to keep the tax-free status of the investment. If the CTF is withdrawn as cash, the tax benefits will be permanently lost.
Vouchers
- At birth: The government gave every eligible child a voucher worth £250 to open the account, and also a further £250 directly into the accounts of children who live in low income families.
- At age 7: The government would have made an additional payment of £250 into the account, with a further £250 for children in low income families.
- At age 11: The government was consulting on the possibility of a further voucher at this age.
If vouchers were not invested within one year of issue, HM Revenue and Customs would open a stakeholder account on behalf of the child.
Subscriptions by individuals were in addition to any voucher subscriptions.
Subscriptions
Parents and other family members or friends can pay £3,600 a year into their child’s fund from 1 November 2011, previously £1,200. Any gains or dividends will be tax free (except for the 10% tax on UK share dividends). Stakeholder accounts cannot set the minimum contribution above £10, but the provider can set a lower minimum.Eligibility
Every child born on or after 1 September 2002 was eligible for the CTF, as long as:- child benefitChild benefitChild benefit is a social security payment disbursed to the parents or guardians of children. Child benefit is means-tested in some countries.-Australia:...
has been awarded for them; - they are living in the United Kingdom; and
- they are not subject to immigration controls
The children of Crown servants posted abroad – including the Armed Forces
British Armed Forces
The British Armed Forces are the armed forces of the United Kingdom of Great Britain and Northern Ireland.Also known as Her Majesty's Armed Forces and sometimes legally the Armed Forces of the Crown, the British Armed Forces encompasses three professional uniformed services, the Royal Navy, the...
– qualify because they are treated as being in the UK.
Investment options
Most advisers recommend equity-based CTFs, and the fact accounts allocated by HM Revenue and CustomsHer Majesty's Revenue and Customs
Her Majesty's Revenue and Customs is a non-ministerial department of the UK Government responsible for the collection of taxes and the payment of some forms of state support....
are put into stakeholder products indicates that the government also believes equities are the best option over such a long period.
- Stakeholder accounts invest in sharesShare (finance)A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
, with a set of rules ("stakeholder standards") to reduce financial riskFinancial riskFinancial risk an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss...
. These include provision for money in the account being gradually moved to lower risk investments or assets when the child reaches age 13. This is to help to produce a stable return in the run up to the child's 18th birthday. The charge on a stakeholder account is limited to no more than 1.5 per cent a year, whereas charges on all other types of CTF account are not limited in this way.
- Savings account. These operate in a similar way to a bank deposit accountDeposit accountA deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
; there is a rate of interest and the nominal value of the funds is secure.
- Non-stakeholder account. Invests funds according to the type of product. These accounts are not protected by the "stakeholder standards".
CTF funds can be transferred between providers. Rules for transfers are similar to those for Individual Savings Account
Individual Savings Account
An Individual Savings Account is a financial product available to residents in the United Kingdom. It is designed for the purpose of investment and savings with a favourable tax status. Money is contributed from after tax income and not subjected to income tax or capital gains tax within a holding...
s – customers should inform the new provider they wish to use and they will undertake the move. No penalty or fee can be imposed for transferring the account, except for the cost of selling shares (such as dealing charges) in equity accounts.
Abolition
On May 24, 2010, the Chancellor of the ExchequerChancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
George Osborne
George Osborne
George Gideon Oliver Osborne, MP is a British Conservative politician. He is the Chancellor of the Exchequer of the United Kingdom, a role to which he was appointed in May 2010, and has been the Member of Parliament for Tatton since 2001.Osborne is part of the old Anglo-Irish aristocracy, known in...
MP and Chief Secretary to the Treasury
Chief Secretary to the Treasury
The Chief Secretary to the Treasury is the third most senior ministerial position in HM Treasury, after the Prime Minister and the Chancellor of the Exchequer . In recent years, the office holder has usually been given a junior position in the British Cabinet...
David Laws
David Laws
David Anthony Laws is a British politician. He is Liberal Democrat Member of Parliament for Yeovil and former Chief Secretary to the Treasury....
MP announced that the £250 top up payments into the child trust fund would cease in August 2010, with no payments for newborns from the end of 2010. The Savings Accounts and Health in Pregnancy Grant Act 2010
Savings Accounts and Health in Pregnancy Grant Act 2010
The Savings Accounts and Health in Pregnancy Grant Act 2010 is an Act of the Parliament of the United Kingdom. It ends government support of Child Trust Funds, the Saving Gateway and the Health in Pregnancy Grant....
facilitates the abolition of the fund.
See also
- Child Trust Funds Act 2004Child Trust Funds Act 2004The Child Trust Funds Act 2004 is an Act of the Parliament of the United Kingdom.-Section 2 - Elligible children:This section is amended by section 1 of the Savings Accounts and Health in Pregnancy Grant Act 2010....
- Asset-based egalitarianismAsset-based egalitarianismAsset-based egalitarianism is a form of egalitarianism which theorises that equality is possible by a redistribution of resources, usually in the form of a capital grant provided at the age of majority...
- Individual Development AccountsIndividual Development AccountsIn the United States, an Individual Development Account is a matched savings account that enables low-income American families to save, build assets, and enter the financial mainstream...
- 'Third Way' political philosophyThird way (centrism)The Third Way refers to various political positions which try to reconcile right-wing and left-wing politics by advocating a varying synthesis of right-wing economic and left-wing social policies. Third Way approaches are commonly viewed from within the first- and second-way perspectives as...
External links
- UK Government Child Trust Fund website
- List of CTF providers
- "Beginner's guide to: Child trust funds" The Independent article, 7 March 2009
- Junior ISA - To replace the Child Trust Fund, 1 November 2011
- "Child trust funds and how else to make your children rich" thisismoney.co.uk article, 27 February 2009
- "Child Trust Funds Explained" Times Online, 20 February 2008