Parents undaunted by curtailment of Child Trust Fund
New research commissioned by leading children's investment provider F&C Investments in advance of National Family Week (31 May-6 June) has indicated that 70% of parents of under-8s would continue to save for them even if the Child Trust Fund (CTF) was abolished entirely.
A further 16% were undecided, while just 14% said the abolition of the CTF would stop them from saving for their children.
The Government announced today that, subject to legislation, vouchers would be reduced from £250 (£500 for low income families) to £50 (£100 for low income families) from 1 August this year, and that no new vouchers would be issued after 1 January 2011. However, parents with vouchers issued before January next year will still be able to open a CTF and top up their child's account with up to £1,200 a year, which will grow tax-free until the child reaches 18. The results of F&C's survey of 2,000 parents of under-18s, carried out online by market research specialists OnePoll.com, show that free money is not the biggest factor in investing for children. Overall 74% of those surveyed saved for at least one of their children, with 50% of those saving having one or more child born before the CTF eligibility date of 1 September 2002.
Bank and building society accounts were the most popular non-CTF choice, with 68% of parents who save saying they use such an account already, while a further 15% would consider doing so. However, there was some reluctance among parents to take risk with their children's investments. Just 7% said they used a children's investment product based on investment trusts or OEICs, and only the same proportion said they would take more risk with their children's investments than they would with their own. Some 58% did not want to risk the value of their children's investments going down at all.
Jason Hollands, Director, Head of Corporate Affairs at F&C, said: "One of the golden rules of investing is that there is a relationship between risk and return, Parents' reluctance to take risk with their children's investments means they may be missing out on the chance of superior returns. Investing for children - particularly if you start early - can have a longer time horizon than almost anything other than pension planning, which means the extra risk/reward potential of equity investment can be particularly suitable. An investment period of 18 years should be enough to ride out short term ups and downs in the equity markets, though of course returns are not guaranteed."
In addition to its shares CTF, which allows investment into more than a dozen F&C-managed investment trusts from just £25 per month per trust, F&C Investments offers a Children's Investment Plan with the same wide investment choice and low minimum investments. The investment trusts on offer include large global trusts such as Foreign & Colonial Investment Trust and British Assets Trust, top performer F&C US Smaller Companies and diversifiers F&C Private Equity Trust and IRP Property Investments.
Around 40% of respondents said they invested regularly on behalf of their children. Of these, nearly eight out of 10 saved less than £50 a month. While every little helps, and even small amounts add up over time, these investments need to be seen in the context of parents' aspirations for their children's savings pots. Just over a third said they wanted their child to have some money to do with as they wish, but 27% were saving to cover school or university costs and 13% to help their child afford their first home. Research into university costs carried out last summer by the Association of Investment Companies (AIC) suggested the average student debt in 2010 would be around £20,000, a figure that would not quite have been achieved by a £50 a month investment into the average-performing investment trust over the preceding 18 years (£18,297; source: AIC/Fundamental Data; past performance is not a guide to the future). This suggests parents will need either to save more, use investments with higher potential returns, or a combination of the two in order to achieve the goal of a debt-free higher education.
Harnessing the power of the family (particularly appropriate in National Family Week) is another way for parents to boost the value of their children's savings. Some 44% of parents said other members of their family or friends invested on behalf of their children. This can have tax benefits too, as income of more than £100 a year on investments made by a parent is taxed as though it were the parent's, whereas this is not the case if the investment is made by someone else, such as a grandparent. Internal research at F&C shows more than half of its Children's Investment Plans are opened by grandparents, many of whom use a bare trust arrangement to mitigate the effects of inheritance tax (providing they survive for seven years after making the gift). Of the 25% of parents surveyed who said they did not currently save for their children, a third said they would not or could not start saving no matter what incentives were offered. Around 9% would be enticed by more tax efficient structures, while roughly equal numbers (around 28% in both cases) said free money from the government, or better interest rates/guaranteed returns would get them saving.
Jason Hollands commented: "It is disappointing that the Government is to prevent parents from voluntarily opening a CTF and funding it entirely from their own resources just because of a wish to cut the cost of the vouchers. We continue to believe that the Government should allow new, voluntary CTFs to be opened once the vouchers have been entirely phased out since the costs to the taxpayer would be limited. At F&C we have consistently felt that the whole CTF project has been overshadowed by the vouchers and that the long term success of CTFs should be measured by the take up in voluntary contributions, not the number of vouchers handed out. Stripped of this ‘benefit' component, the CTF has all the ingredients of a perfectly sensible savings scheme. "Irrespective of the future of CTFs, other savings options exist for parents such as buying investments through a bare trust. These carry certain advantages over CTFs in that there is no cap on the amount you can invest, there is more control over when the child gets access to the funds and they can be tax efficient. F&C has long offered a Children's Investment Plan utilising these options and will continue to operate as a leading provider of children's savings schemes."
For more on F&C's range of children's savings options, visit fandc.co.uk.