Child trust fund falls victim to cuts

Posted on: 14 July 2010 by George Pamplin

Coalition ends failed tax–free child trust fund voucher scheme as George Osborne attempts to reduce the nation's huge deficit.

Child trust fundsWhen the child trust fund was first announced, I have to say I nearly choked. To what problem was it a solution? I couldn't fathom it out. Most people took the voucher as free money and to date I have never met anyone who ever wanted to top the initial voucher up. No surprise really.

Its basic problem was saving into a fund that was automatically owned at age 18 by their child. Few parents wanted that lack of control over the destination and timing of the capital. Investors also wanted advice on where to place the money but the cost of the fund choice would have been as much as the voucher given to them. Advisers offered little expertise as they knew there would be no demand for it. And so the idea has died with great expense to the taxpayer.

The government has just announced that it will reduce, then stop all government contributions to child trust funds. It is intended, subject to legislation, to stop government contributions at age 7 from the 1st of August 2010 and new child trust fund vouchers will stop being issued from 01/01/2011. So if your child turns seven after August 2010 they will miss out on the age seven payment.

In the meantime there are a few questions to be asked: If you have a child trust fund, it will continue to operate as normal and will continue to grow tax-free until the child’s 18th birthday with no withdrawals permitted.

Friends and family will continue to be able to contribute up to a total of £1,200 a year both now and in the future, as there are no plans to change that.

If you have a voucher you should use it, but in any event the government will open a default child trust fund for your child if you haven’t used it.

If you have taken out a child trust fund already, you can continue to transfer between providers and funds if you want to find the better performers, or if you want to reduce charges.

Contributions will be reduced for children born from August from £250 to £50 for children in better off families, and from a total of £500 to £100 to children in lower income families. What’s the point? Why don’t they just stop it completely?

I have a number of friends who are expecting a child who are trying to move things on with a curry etc, but they, like everyone else, will be able to get the voucher as long as they meet all the relevant requirements before the legislation is in place.

To be eligible for a child trust fund voucher you just need to be able to show you are making a valid child benefit claim and your child isn’t subject to immigration control.

There are a number of issues in relation to extra payments such as the additional payments of £250 for children in lower income families. If you become entitled to this before the legislation comes into place, you will receive the extra payment, and even if you haven’t had a tax credit award finalised for 2009/2010, you will still get that additional payment paid to your child trust fund account.

For those entitled to disability living allowance at any time in 2010/11 and expecting a disability payment into their child trust fund, this will be paid, but it is expected that these payments will cease from 2011/12 onwards.

If you have lost your voucher you can apply for another at the government child trust fund website.

And finally, although government contributions have stopped, no new child trust funds are likely to be allowed to be open. Heartbreaking!

By Peter McGahan

Need Expert Advice?

Peter McGahanPeter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.

Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.

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