 Introduction
The Child Trust Fund (CTF) is a UK government proposal for a universal account, opened for all children at birth, with an endowment contributed by the Government at birth and at ages five, eleven and sixteen. Every newborn child would receive an endowment, with those in families on lower incomes receiving a larger amount.
It is effectively a stakeholder grant - in that it will be made available to young people - probably when they are 18 - and is a universal payment - made to both princes and paupers.
Details
The CTF would complement rather than replace any existing element of the British welfare state. The account would be set up at birth (giving rise to the name 'Baby Bonds') - probably triggered by payment of Child Benefit (a universal payment given to all families with children - with a take up rate of 98%).
The government would pay in an amount to all accounts. However, in what is termed progressive universalism, larger payments would be made to children from poorer families. Further payments would be made at ages 5, 11, and 16. Family and friends would be able to make additions to the CTF - up to an annual limit. The money could be invested in the stock market - the 18 year time span should enable a balanced asset investment approach.
Once the money is placed in the accounts parents will not be able to withdraw it - it will be locked away. This does raise the possibility of low income families saving too much for their children and later regretting it.
When they are 18 the young person can withdraw the money - an use it for whatever purpose they wish. While the government consider paternalistic restrictions it was thought that the problems associated with policing the use of the funds outweighed the benefits.
The government will - through the UK national curriculum - make financial education compulsory and link these classes to the CTF.
The CTFs will be operated by the financial services industry - either through open competition or a system of licensed providers.
Illustrative Example
The UK government provided the following example to illustrate how the CTF might operate. The values mentioned are not real - the actual value of the endowments has not yet been set.
"The following illustrative assumptions for the Child Trust Fund are used in calculating the examples below:
? that for parents below a threshold income level, the Child Trust Fund pays an endowment of £800;
? that the endowment will be staggered over time, with £500 paid at birth, and further tranches of £100 paid at ages five, eleven and sixteen;
? that for all other parents, the Child Trust Fund pays a total endowment of £400, similarly staggered into an initial payment of £250 at birth, followed by three payments of £50 at ages five, eleven and sixteen.
Example: Daphne and Eric have a joint household income below the threshold. When their baby, Jane, was born, the Government paid £500 into a Child Trust Fund for Jane. Jane?s grandparents also make regular monthly contributions of £5 a month into Jane?s Child Trust Fund. By the time she reaches the age of eighteen, Jane will have received further payments of £100 from the Government on each of her fifth, eleventh and sixteenth birthdays. When her Child Trust Fund matures, Jane will have access to assets worth £3,376 in real terms, comprised of:
? a £800 endowment from the Government;
? £1,080 of regular contributions from her grandparents; and
? £1,496 of interest, calculated monthly" (assumes 5% interest rate).
Summary
Centrally managed set-up process, linked to Child Benefit systems.
Progressive endowment at birth, with additional Government top-ups at ages five, eleven and sixteen.
Additional contributions ? up to an annual limit ?payable by parents, other family and friends, and children, with growth exempt from tax.
Investment of assets in a wide range of vehicles, including equities.
No access to assets, including additional contributions, until account maturity.
Maturity of account at age eighteen.
No restrictions to be placed on use of assets at maturity.
Financial education to be fully integrated into Child Trust Fund account through financial services providers, school curriculum and other providers.
Further Reading
Carl Emmerson and Matthew Wakefield, "The Savings Gateway and the Child Trust Fund: Is Asset-Based Welfare 'Well-Fair'?", Institute for Fiscal Studies Commentary 85, 2001 UK
Julian Le Grand, "Implementing Stakeholder Grants: the British Case", Working Paper for the Havens Center Rethinking Redistribution Conference, 2002 UK
David Nissan and Julian Le Grand, "A Capital Idea: Start Up Grants for Young People", Fabian Society, 2000 UK
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