Select Committee on Treasury Written Evidence


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many will have moved house following the birth of a child and some of the data held by HMRC may as a consequence be out of date resulting in people not actually receiving details of the CTF in the post.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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