Memorandum submitted by Family Investments
EXECUTIVE SUMMARY
The Child Trust Fund (CTF) has been successfully
launched into the UK savings landscape. Indeed whilst concerns
have been expressed about the level of take up of vouchers a market
which is more than 50% penetrated within seven months of its launch
would in most circumstances be regarded as highly successful.
On reflection we believe that providers were
at the start probably over optimistic with regard to the public's
reaction to a "free offer" of £250 and did not
take enough heed of the challenges with any new product looking
to gain acceptance by the general population.
Our key points are:
1. As the public become more familiar with
the CTF the percentage of active take up will increase.
2. Parents are confused by the relative
merits of the CTF investment choices.
3. There is plenty of information available
about the CTF but a general lack of advice.
4. In the absence of advice people need
clearer direction.
5. The number of Revenue Allocated Accounts
given to each provider should be proportionate to size of the
providers CTF book.
6. Early confirmation of the additional
Government contributions payable at age seven and 11 would bring
greater certainty to the CTF market.
1. As the public become more familiar with
the CTF the percentage of active take up will increase
All new products take time to gain acceptance
from the public and indeed some never do. Personal Equity Plans
and Individual Savings Accounts also took some time to win public
confidence. Our research shows that the concept of the Child Trust
Fund carries a high degree of support but it will take some time
for people to become familiar with the mechanics of taking out
a CTF and the choices to be made. It should also be borne in mind
that the initial allocation of CTF vouchers was for children which
were up to two and a half years old when the scheme was launched.
Many parents of such children had already started savings plans
on their behalf and were consequently less motivated to consider
the CTF. Also many will have moved house following the birth of
a child and some of the data held by HMRC may as a consequence
be out of date resulting in people not actually receiving details
of the CTF in the post. The early evidence we have is that take
up of vouchers for children born after 5 April 2005 is faster
than for those born earlier.
2. Parents are confused by the relative merits
of the CTF investment choices
There are three principal investment choices
which a parent can make. The stakeholder and the two non stakeholder
options of equity and cash.
Many parents even those who could be regarded
as financially aware have found difficulty in making a choice
and are naturally concerned about doing the best for their child's
future. The net result is that the decision is deferred as being
too difficult to do now and the voucher remains "unbanked".
The recent introduction of the HMRC CTF toolkit
will we believe go some way to help but there remains no clear
direction for parents to follow.
3. There is plenty of information available
about the CTF but a general lack of advice
It is not difficult for parents to gain information
on the CTF starting with HMRC mailings, website and helpline and
supported by similar actions take by providers and distributors.
However the combination of low margins in the CTF product itself
coupled with the cost of delivering even basic advice under the
investment product regulations has resulted in the fact that informed
advice is generally not available.
Many CTF parents are new to saving of any description
and need the support of others to get started especially as the
various investment options complicate the decision making process.
The selling regulations for CTF products invested
in cash are far simpler than those for "Investment Products"
such as the stakeholder. We consider that the difference is inappropriate
for an 18 year "lock-in" product and all the investment
choices should come under the same selling regime. There is we
believe considerable merit in simplifying the selling regulations
for the initial investment of the CTF voucher to ensure as many
as possible get to the "starting gate" at the earliest
opportunity.
4. In the absence of advice people need clearer
direction
To maximise take-up in a non advised mass market
ideally the choice should be simply whether to take out the product
or not. Further options at the time the product is first offered
only serve to confuse which leads to inaction.
Further options can be successfully offered
once the product is established in the customers mind but generally
not at outset.
If it is decided that the present three investment
options should remain we believe that the stakeholder should be
stated as the Government's preferred option for those people who
are in doubt as to which investment route to choose. This would
be consistent with the Revenue Allocation process where vouchers
which have not been taken up are allocated to providers who must
then invest the monies in a stakeholder account.
5. The number of Revenue Allocated Accounts
given to each provider should be proportionate to size of the
providers CTF book
The current process for Revenue Allocated Accounts
(RAA's) is to distribute such accounts equally between providers
who have registered to accept RAA's.
We understand there are presently 11 RAA providers
who are currently expected to receive in the Spring of next year
as many as 60,000 RAA's each. In several cases this will mean
that a provider will receive in little over a month considerably
more accounts through the allocation process than they actively
acquired in the whole of the previous year.
We have concerns that the above could put an
undue level of strain on smaller providers which in time could
lead to a poor level of service to their allocated account customers.
This risk would be considerably reduced if the
number of accounts allocated was in proportion to the size of
the active book of each provider.
6. Early confirmation of the additional Government
contributions payable at age seven and 11 would bring greater
certainty to the CTF market
Presently it has not been confirmed what level
of Government contribution will be made when a child reaches age
seven and although consultation has taken place about further
additional payments at age 11 it has yet to be confirmed whether
these will take place.
Our preference would be for the same payments
to be made at seven and 11 as those available at outset namely
£250 basic for all children plus a further £250 for
those children whose family claim full tax credit.
Confirmation that these extra payments will
be made will add to the attractiveness of the scheme and aid take
up.
November 2005
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