AIC calls for Child Trust Fund to continue
The AIC has called on the Government to allow new parents the option to set up and contribute to Child Trust Funds even after Government contributions have been phased out. This would have no significant impact on tax revenues, but would encourage new parents to save for their children's future.
Earlier this week the Government announced plans to cut public expenditure, which included phasing out public payments into Child Trust Funds - with all contributions stopped by 1 January 2011.
Ian Sayers, Director General, Association of Investment Companies (AIC) said: "The state of the public finances means that ministers have to make hard choices over future spending commitments. This week's announcement made clear that Government contributions into Child Trust Funds are an early casualty of this process.
"This is unfortunate but perhaps unsurprising given the previous commitments made by the coalition partners before the General Election. However, one issue which is not yet clear is the future of the wrapper itself. Even without Government payments, we believe the Child Trust Fund structure has value as a means of encouraging families to save for their children.
"Allowing new parents to set up and contribute to Child Trust Funds should not cost the Government any tax revenues. If the CTF wrapper did not exist, parents could still save £100 a month for their children and manage the fund over time without the child paying tax, as children have their own annual income and capital gains tax allowances. Although income arising to children can be taxed as their parent's income in some circumstances, this could be mitigated by investing in capital growth orientated investment companies, or by grandparents making the contributions.
"However, the Child Trust Fund wrapper makes saving for children a simple and straightforward process and encourages parents and grandparents to put money aside on their behalf. There would be no need to buy and sell investments over time to utilise the child's capital gains allowance, so transaction costs would be reduced. Allowing new accounts to be set up would mean that parents who have already opened an account for an existing child can carry on the habit of saving for their later arriving brothers and sisters. It will also provide a stimulus for new parents to save for their child's future and hopefully develop a savings habit.
"Even without Government contributions the Child Trust Fund has a role to play in encouraging financial awareness and planning for the future. Given current concerns about low levels of saving and indebtedness it would be wrong to remove a savings option which could make a positive contribution to addressing this agenda without creating a burden for the public purse."