APPENDIX: MEMORANDUM FROM HM TREASURY
THE OBJECTIVES OF CHILD TRUSTS FUNDS
1. The Child Trust Fund is an ambitious,
pioneering programme which seeks, through a significant long term
investment by the Government, to provide a financial asset to
all children when they reach the age of 18, and to change people's
behaviour towards saving. Whilst those with higher income may
make most use of the opportunity, we feel that this gives less
well off families an unprecedented chance to build up a tax-free
sum for their children. (Paragraph 21)
2. We note the Treasury's figures showing
the potential significance of additional contributions from family
and friends to the value of Child Trust Fund accounts at maturity.
The Government is right to acknowledge the possibility that some
families could lock away funds unwisely in Child Trust Fund accounts
in the belief that this was in the best interests of their children.
We therefore welcome the commitment to provide advice in both
the information pack and promotional literature. We endorse the
proposal to set out a hierarchy of savings objectives that promotes
firstly paying off debt and secondly saving for a rainy day, ahead
of any additional contributions to the Child Trust Fund. This
information and advice needs to be clear and unambiguous. (Paragraph
22)
3. The Government has decided not to
place any restrictions on the use of Child Trust Funds when they
mature at age 18. We endorse the Government's hope that the funds
will be spent on worthwhile projects, and acknowledge the practical
difficulties of devising a scheme to ensure that this is the case.
(Paragraph 23)
The Government thanks the Committee for recognising
the objectives and opportunities afforded by the introduction
of the Child Trust Fund (CTF).
The Government is working closely with interested
parties, including the Financial Services Authority and groups
with expertise in communicating with parents, to ensure that the
information that we send to parents clearly outlines their options
with respect to the CTF. This will be user tested to ensure that
the messages are easily comprehensible and understandable.
Updated illustrative growth projections for the CTF
(reflecting the announced charge cap of 1.5%) are available on
the Inland Revenue website: http://www.ir.gov.uk/ctf. These supersede
the previous projections set out in table 3.1 of the October 2003
paper Detailed proposals for the Child Trust Fund.
4. We note the Government's intention
to monitor and publish regularly reports on the progress of the
Child Trust Fund programme. We may wish to return to this subject
in the light of the information these contain. (Paragraph 24)
The Government is developing an evaluation plan for
the Child Trust Fund programme. The information we gather will
be used to inform any future developments.
The first statistics on the Child Trust Fund will
be available in 2007. These statistics will be extracted from
returns financial providers make in September 2006. Up-dated statistics
will be available annually from 2007.
ENTITLEMENT TO A CHILD TRUST FUND
5. We recognise that a cut-off date
for entitlement to Child Trust Funds is required and consider
that the choice of 1 September seems sensible. We note that the
Government plans to recompense children born between 1 September
2002 and April 2005, when Child Trust Fund accounts are due to
be available, for lost growth in their accounts by means of higher
initial Government endowments, and that the additional amounts
will be set out in regulations. (Paragraph 32)
The Government recognised the need to compensate
children born between September 2002 and April 2005 for the lost
growth in their accounts. The amounts were published with the
regulations on 2 February 2004, and are as follows[1]:
All children born between 1 September 2002 and 5
April 2003: £277
Supplement for this group: £266
All children born between 6 April 2003 and 5 April
2004: £268
Supplement for this group: £258
All children born between 6 April 2004 and 5 April
2005: £256
These figures are based on a real growth of 4.5%,
nominal rate of about 7% assuming inflation of 2.5%, in accordance
with FSA guidelines.
6. We consider that the natural reaction
of parents with children born on either side of the cut-off date
will be to try to see that they are treated equally. This may
mean that those parents with sufficient financial resources will
make additional provision for children who do not qualify for
a Child Trust Fund account. We believe they would be encouraged
to do this if Child Trust Fund accounts, identical in all respects
save the absence of a Government endowment, were available for
their other children. (Paragraph 33)
7. In the light of the evidence that
the costs to the Treasury of the extra tax relief afforded by
Child Trust Funds is negligible, we recommend that consideration
be given to extending the availability of Child Trust Fund accounts
but without Government endowments, to children born before 1 September
2002. (Paragraph 34)
The Government recognises that some parents will
want to open similar accounts for older children and add their
own endowment to the fund on a voluntary basis.
If the Government were to open accounts for all children
born before 1 September 2002 but not provide a Government endowment
for them, this would create some 10 million accounts with real
uncertainty about the level of savings and investments that would
be made in them. Such an exercise would be very costly for providers.
The Government has looked carefully at this and at providing accounts
only where they are requested by parents but it would not be possible
for these to be up and running by April 2005 when providers would
like them to be available to market alongside the CTF.
However, the Government is sure that if there is
a gap in the market place the industry will provide equivalent
products, perhaps with a charge cap and lifestyling facility that
matches their Child Trust Fund products. Children have a personal
tax allowance of £4,615 and a parent is taxed on a child's
account only when his or her gift produces more than £100
gross income per year.
The Government will monitor the situation before
and after the introduction of the CTF to establish if there is
any evidence of an unmet demand in the marketplace.
ADVICE TO PARENTS
8. We support the proposal that simple,
low cost, accessible and risk-controlled stakeholder Child Trust
Fund accounts should be developed. We note the Government's firm
preference that Child Trust Funds be invested in equity-based
accounts on the grounds that these are likely to generate higher
returns over the longer term than cash accounts. However, we also
note that the potential for higher returns from equity based accounts
is accompanied by a higher degree of risk that some families may
not wish to face. We recommend that this be made clear to all
parents in the information pack so that they can take into account
their individual circumstances when deciding. If an easily understood
risk evaluation can be designed, it should be provided with the
information pack. (Paragraph 41)
The Government wants parents to engage actively with
the Child Trust Fund and recognises that for many parents this
will be their first investment decision. To ensure that we provide
appropriate support for parents, the Government has commissioned
research into the best way to communicate complicated financial
and investment decisions. This will inform the information pack
which will be sent to all parents alongside the voucher to open
the account.
The Government is working closely with interested
parties, including the Financial Services Authority and groups
with expertise in communicating with parents to develop this information
pack. The pack will include illustrations showing parents the
impact of a range of investment choices and contribution levels
on account growth, and the risks associated with these choices.
REVENUE ALLOCATED ACCOUNTS
9. We support steps to ensure that
no child loses out from parents, or someone acting in that capacity,
not opening a Child Trust Fund account on their behalf. In such
cases the Revenue will open an equity based account and choose,
albeit by rota, the provider to manage that account. We note the
evidence from the Treasury and the Inland Revenue that they have
obtained legal advice to the effect that in the event of any subsequent
difficulties any accusations of mis-selling would be unsuccessful.
(Paragraph 45)
The CTF Bill requires the Inland Revenue to open
an account for children in three circumstances:
- For children whose voucher
has not been used within a year of issue;
- For children looked after by local authorities
for whom no Child Benefit award has ever been made and who would
otherwise have no access to a Child Trust Fund; and
- For the children of parents under 16 who cannot
by law administer a CTF account until they are 16.
In these circumstances draft regulations require
the Revenue to apply to a provider to open a stakeholder account
for the child. The draft regulations also set out that the Revenue
will do this by rotating down a list of providers offering these
accounts.
The CTF Bill states that there will be no liability
for the Revenue in relation to the selection of account and of
provider if these regulations are complied with.
The stakeholder account will be equity-based as this
is likely to give the best return over 18 years, and the risk
involved will be controlled with providers required to diversify
investments and move them to cash-based assets as the fund nears
maturity. In addition, the charge cap and the regulation surrounding
minimum contributions on stakeholder accounts will ensure they
provide value for money.
INTERACTION WITH THE WELFARE SYSTEM
10. There is a potential interaction
of the Child Trust Fund with the welfare system (or any other
entitlements that might be affected by possessing an asset) which
might deter additional contributions to Child Trust Fund accounts
from family and friends, if the result were to be a potential
reduction in benefits for the child in the future, or an actual
reduction in benefits for the contributor. (Paragraph 49)
11. The Government therefore needs
to clarify the extent of this potential interaction, in order
to overcome fears of potential disadvantage to the child in later
life. We believe it is essential that this is done before the
scheme starts, and we therefore welcome the statement by the Financial
Secretary that this will be the case. We believe it would be helpful
if these matters were clarified and resolved during the passage
of the Bill through the House. (Paragraph 50)
Child Trust Fund assets and the income and gains
from those assets do not impact on family benefits and tax credits
before the account reaches maturity when the child reaches 18.
After the child's 18th birthday the account
will cease to be a CTF account. The Government's intention is
that when the CTF account matures, the funds can (if the account
holder wishes) be rolled over into tax effective savings schemes
available at the time. Income from investment in tax-free saving
schemes do not affect entitlement to tax credits. But the Government
acknowledges that there may be concern that saving in the Child
Trust Fund or any other savings vehicle may affect entitlement
to benefits such as Income Support when the individual is an adult.
The treatment of capital in income-related benefits
needs to strike a sensible balance between providing targeted
state support and not unfairly penalising those who have acted
responsibly by saving. The Government will keep this under review.
As a first step we announced during the second reading of the
Bill that from 6 April 2006 we will increase the £3,000 threshold
above which savings reduce eligibility to Income Support, Jobseeker's
Allowance, Housing Benefit and Council Tax Benefit to £6,000
(in line with pension credit).
The Government also recognises there has been some
concern about the application of capital deprivation rules with
respect to the CTF.
Capital deprivation rules for income-related benefit,
such as Pension Credit are designed as anti-abuse measures. The
rules are needed to deal with cases where the real purpose in
spending or otherwise disposing of savings is to get benefit or
increase the amount of benefit payable. This places an unfair
burden on taxpayers.
Whether payment into a CTF is treated as a deprivation
of capital is a matter of judgement for the decision maker which
will depend on all the circumstances of the case. But it would
be reasonable to expect that in most cases it is unlikely that
modest contributions to a CTF would be treated as deprivation
of capital; the Pension Credit rules will be applied in a fair
and consistent manner for CTF contributions and other payments.
PROVIDING CHILD TRUST FUND ACCOUNTS
12. We consider that the success of
Child Trust Funds will depend in part on attracting a wide range
of providers. Whether sufficient providers enter the market will
depend on the level of any charge cap and the regulatory regime
that applies to Child Trust Funds, factors on which decisions
are still awaited. (Paragraph 60)
13. We note that some key players have
indicated that they are unlikely to provide Child Trust Funds
if charges are capped at 1%. We consider that low charges will
be important to ensure that adequate returns are generated from
sums invested in Child Trust Funds. (Paragraph 61)
14. The Child Trust Funds Bill was
introduced into the House without the relevant regulations covering
important aspects including the proposed sales regime. We consider
that these must be produced in time for the standing committee
to consider them thoroughly. (Paragraph 62)
Draft regulations, published on 2 February, have
set the level of the charge cap for stakeholder CTF accounts at
1.5% per year. The Government has set the charge cap to encourage
a wide selection of providers to offer CTF accounts. A large number
of providers will encourage competition, ensuring the best value
for consumers. The Government will continue to monitor that the
level of the charge cap best meets the interests of consumers.
The Government's decision was based upon all available
evidence, and it recognised that the economics of the CTF are
very different to the other stakeholder products. The CTF had
certain key characteristics which were not typical of other products
in the stakeholder suite, in particular CTF accounts will be smaller
in terms of the average size of funds compared to pensions and
will have a lower minimum contribution level than other stakeholder
products.
The evidence base for the decision included the report
commissioned by Deloitte, which analysed the trade-offs of different
charge caps for providers and consumers. The research will be
put into the public domain once a decision on the charge caps
for the other stakeholder products has been made.
Research by the FSA has shown that the simplified
sales regime they have been working on for stakeholder products
needs further development. However, the CTF is likely to be less
dependent on the simplified sales regime than the other stakeholder
products. Many providers have said they intend to use direct offer
as the main channel for selling the CTF. The Government will continue
to work with the Financial Services Authority on the development
of the sales regime for the CTF.
CONCLUSION
15. The Child Trust Fund programme
has the potential to make a significant impact, particularly on
people's attitude to saving. But the Government is committing
itself and its successors to significant expenditure under this
initiative, potentially over £4 billion over the next 18
years. It must therefore get the details of the scheme and its
implementation right. (Paragraph 63)
The Child Trust Fund represents a new and imaginative
way of encouraging children and their parents to save for the
future, aided by an initial contribution from the Government
for all children. The draft regulations published on 2 February
2004 set out in more detail how the scheme will work, including
the charge cap. The Government looks forward to hearing the views
of the financial services industry and other stakeholders and
working with them to ensure the successful delivery of the CTF
in 2005.
HM Treasury
10 February 2004
1 We separated children into 3 bands according to the
tax year to reduce administration costs. For the initial payment,
we calculated growth at the middle of each of these bands. For
the supplement we took the April at the end of each band, which
is when the supplement would normally be paid to the family (because
a child tax credit award can only be finalised after the end of
the relevant tax year). Back
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