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28 October 2003
Detailed proposals for the Child Trust Fund (CTF) were published today. As the Chancellor announced in Budget 2003, each child born on or after 1st September 2002 will receive an initial endowment of £250 rising to £500 for the poorest children – a reform which is progressive and universal, benefiting every child and with more to those who need help most.
Amongst the measures announced today are:
The fund will help to build up a stock of assets for the young person to reinvest or use when they reach 18 years of age, giving them added security and opportunity in adulthood. Financial education will also help individuals to make better financial choices throughout their lives.
Commenting on the proposals, Financial Secretary Ruth Kelly said:
“The Child Trust Fund will ensure that children will have assets of their own to help them get a better start to their adult life. It is a leading example of the Government’s commitment to an active welfare strategy based on the principles of security, opportunity and responsibility for all.
“It will also give young people experience of savings and investment opportunities and help them to manage their finances better in later life.”
A child will be eligible for a CTF account if Child Benefit has been awarded to them and they are living in the UK. If these conditions are met the CTF is awarded automatically with no need to make a separate application.
The Government wants to ensure that children in care also benefit from the CTF. As Child Benefit is not claimed for these children, special arrangements are being made for them. A stakeholder account will be opened for them and they will receive all the payments outlined above, including the additional payments made to children in lower income families.
When CTF accounts become available in 2005, a voucher for £250 will be sent to the Child Benefit claimant, usually the parent. This voucher is then used by a person who has parental responsibility for the child to open a CTF account with the provider of their choice.
To ensure no child loses out, if an account has not been opened within one year of the issue of the voucher the Inland Revenue will open a stakeholder account for the child. The parent is free to assume responsibility for that account later at any time, if they wish.
Before CTF accounts become available in April 2005, vouchers and information will be sent to parents or children born between September 2002 and April 2005. These vouchers will have a higher value, recognising that for these children there will be less time for their CTF to grow in value before maturity. The value will be decided at a later date.
In order to give further help to children from families on lower incomes, children will receive an additional payment of £250 if they belong to a family receiving Child Tax Credit and have a gross family income of up to the level of income where Child Tax Credit begins to be tapered away, currently £13,230. A further payment will be made to every child for its seventh birthday, again with an additional payment to children from families on lower incomes. The amounts of both these payments will be decided at a later date.
Family and friends of the child, and the children themselves when older, can make additional contributions of up to £1200 a year between them. This can help to provide a substantial asset base for the child to draw on in later life. Industry providers might also wish to accept tokens from retail schemes that parents, family and the child themselves can put into a CTF account.
Children will not be taxable on the income and gains they make on the investments in their CTF account, or when the funds in their account mature when they reach 18 years of age, but there will be no tax relief for contributions made to a CTF account.
The Government has also decided that the settlements legislation should not apply to income arising on parental contributions to a CTF. The settlements legislation provides that where a gift from a parent gives rise to income of more then £100 in a year, the parent is taxed on all that income at his or her own tax rate. Contributions to a CTF account will not count towards this limit.
There will be different sorts of accounts available to suit everyone’s needs, including cash deposit accounts, unit trusts, life products. To ensure that all children have the opportunity to benefit from the generally higher returns on equities (shares) over the longer term - 18 years in most cases - all providers must also offer a stakeholder CTF account which is a low-cost equity account that is risk controlled. Accounts opened by the Inland Revenue for children whose parents have not opened a CTF account will be stakeholder accounts.
A person with parental responsibility for the child will usually open the CTF account, and will be able to decide how the account is managed and which type of CTF account is most suitable for the child. As the child becomes older, they will be encouraged to take an active interest in their CTF account as part of the wider programme of financial literacy the Government is supporting. Parent and child will be able to discuss and learn from the experience of managing the CTF account, knowledge that will help them approach the wider range of financial decisions that will face them in later life.
No money paid in to the CTF can be drawn out until the child’s eighteenth birthday. This is to ensure that these long-term savings accounts have the opportunity to provide the most substantial asset base for the young person when they reach a key life stage.
When the child reaches 18 years of age, they can choose what to do with the contents of the fund. In many cases they may wish to reinvest the money in the most advantageous products available at the time to continue to provide savings and security throughout their lives, but they are free to use the money for needs as they arise, perhaps for computer equipment, training or transport to help them get the job of their choice, or to help with housing and family costs of their own.
By allowing children to interact with their own savings or investment account the CTF will strengthen the delivery of financial education in schools. The design of the CTF, including an additional Government contribution to the account at the age of seven, annual statements issued by providers to all children, teaching and learning resources for use in the classroom and a dedicated website, will help children engage with their account and make the best use of the assets at account maturity.
The Government will also provide resources to ensure parents are helped to make choices about their child’s CTF including an information pack to be used alongside the CTF voucher and will work with the Financial Services Authority (FSA) to ensure their consumer activity includes the CTF.
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