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Child Trust Funds House of Commons Treasury Committee Child Trust Funds Second Report of Session 2003–04 Report, together with formal minutes, oral and written evidence Ordered by The House of Commons to be printed 10 December 2003 HC 86 (Incorporating HC 1284-i & ii of Session 2002–03) Published on 15 December 2003 by authority of the House of Commons London: The Stationery Office Limited £17.50 The Treasury Committee The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration and policy of the HM Treasury and its associated public bodies. Current membership Mr John McFall MP (Labour, Dumbarton) (Chairman) Mr Nigel Beard MP (Labour, Bexleyheath and Crayford) Mr Jim Cousins MP (Labour, Newcastle upon Tyne Central) Angela Eagle MP (Labour, Wallasey) Mr Michael Fallon MP (Conservative, Sevenoaks) Norman Lamb MP (Liberal Democrat, Norfolk North) John Mann (Labour, Bassetlaw) Mr George Mudie MP (Labour, Leeds East) Mr James Plaskitt MP (Labour, Warwick and Leamington) Mr David Ruffley MP (Conservative, Bury St Edmonds) Mr Robert Walter MP (Conservative, North Dorset) The following Member was also a member of the Committee during this inquiry: Mr Andrew Tyrie MP (Conservative, Chichester) Powers The Committee is one of the departmental select committees, the powers of which are set out in the House of Commons Standing Orders, principally in SO No. 152. These are available on the Internet via www.parliament.uk The Committee has power to appoint a Sub-Committee, which has similar powers to the main Committee, except that it reports to the main Committee, which then reports to the House. All members of the Committee are members of the Sub- Committee, and its Chairman is Mr Michael Fallon. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) from Session 1997-98 onwards are available on the Internet at: www.parliament.uk/parliamentary_committees/treasury_committee/treasury_co mmittee_reports.cfm. Contacts All correspondence for the Treasury Committee should be addressed to the Clerk of the Treasury Committee, 7 Millbank, House of Commons, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5769. The Committee’s email address is: [email protected]. 1 Contents Report Page Introduction 3 The objectives of Child Trust Funds 4 The costs of the programme 4 Projected benefits 5 Saving 5 Asset-based welfare 7 Measuring progress 8 Restrictions on use at age 18 8 Conclusions on the objectives 9 The Proposals 9 Entitlement to a Child Trust Fund 10 Advice to parents 11 Revenue allocated accounts 13 Interaction with the welfare system 14 Providing Child Trust Fund accounts 15 Conclusion 19 Conclusions and recommendations 20 Formal minutes 23 Witnesses 25 List of written evidence 25 Oral evidence Ev 1; 34 Written evidence Ev 20; 65 Child Trust Funds 3 Introduction 1. The Treasury Committee established a Sub-committee in July 2001 to scrutinise the work of the various bodies for which Treasury Ministers are accountable. The Sub- committee announced, on 28 October 2003, an inquiry into the Government’s proposals for Child Trust Funds set out in a paper issued by HM Treasury and the Inland Revenue that day.1 We heard oral evidence from HM Treasury and the Inland Revenue on 12 November 2003, from the Association of British Insurers, the British Bankers’ Association, the Children’s Mutual and Norwich Union on 19 November 2003, and from Ruth Kelly MP, the Financial Secretary, on 3 December 2003. We also received a number of written submissions, most of which we have published with this volume. We are grateful for all the evidence we have received, written and oral. 2. The Government first consulted on Child Trust Funds in Saving and Assets for All,2 published in April 2001 which sought agreement on the broad principles behind Child Trust Funds. This was followed in November 2001 by Delivering Saving and Assets,3 which set out more specific proposals for the scheme. The detailed proposals, published in October 2003, set out how Child Trust Fund accounts will work including: • the qualifying conditions; • the particular features of Child Trust Fund accounts; • what parents and providers will need to do in operating accounts; and • the role of financial information, education and consumer protection.4 3. Under the proposals all children born from 1 September 2002 will be eligible for a Child Trust Fund account. Key features of the scheme include: • All children in the UK will receive a Government endowment of £250 and children in families receiving full Child Tax Credit will receive an additional £250. • The Government will make a further payment at age 7. • Family and friends will be able to contribute up to £1,200 a year between them to the fund. • Child Trust Fund accounts will be owned by the child and be in the child’s name. Access to the Child Trust Fund account will be at age 18, with no restrictions on the use of the Fund. 1 HM Treasury and Inland Revenue, Detailed proposals for the Child Trust Fund, 28 October 2003 2 HM Treasury, Saving and Assets for All, The Modernisation of Britain’s Tax and Benefit System, Number Eight, April 2001 3 HM Treasury, Delivering Saving and Assets, The Modernisation of Britain’s Tax and Benefit System, Number Nine, November 2001 4 Detailed proposals for the Child Trust Fund, paras 1.3, 1.4 4 Child Trust Funds • Provision of Child Trust Fund accounts will be by open market competition with any authorised provider able to enter the market. Providers will be able to offer a variety of accounts. However, all providers must offer a stakeholder account – a low cost risk- controlled equity account. • All income and capital growth will be tax exempt.5 4. We have conducted this inquiry into the proposals for Child Trust Funds with a view to informing the House’s debates on the Child Trust Fund Bill, introduced into the House of Commons on 27 November 2003.6 The objectives of Child Trust Funds 5. Child Trust Funds are part of the Government’s savings strategy “which aims to ensure that a range of savings products is available to suit people at all stages in their lives.”7 The Government believes that Child Trust Funds will: • help people understand the benefits of saving and investing; • encourage parents and children to develop the savings habit and engage with financial institutions; • ensure that in future all children have a financial asset at the start of their adult life to invest in their futures; and • build on financial education to help people make better financial choices throughout their lives.8 6. The Financial Secretary told us that “there are multiple objectives for the Fund. One is to encourage people to build an asset up so they can think about their future in a different way; another is to encourage people to understand the benefits of saving and investment; a third is to encourage a savings habit to be developed, and the fourth is to build financial education around the product and to use it to help people make informed choices and become responsible for their own decisions […]”9 The costs of the programme 7. The explanatory notes to the Child Trust Funds Bill state that “the Child Trust Fund will involve significant public expenditure as the Government will be paying contributions to all children born from 1 September 2002 into the future. Initial contributions (£250 for all children and an additional £250 for children in families on lower incomes) will be met from Annually Managed Expenditure and have been estimated at around £235 million per annum. […] The value of the additional endowments at age 7 has not been announced – 5 Detailed proposals for the Child Trust Fund, page 4 6 Child Trust Funds Bill [Bill 1 (2003-04)] 7 Detailed proposals for the Child Trust Fund, para 1.5 8 Detailed proposals for the Child Trust Fund, para 1.6 9 Q 315 Child Trust Funds 5 this is an issue that will be determined in future Budgets.”10 The Inland Revenue told us that the probable cost of developing and implementing the Child Trust Fund would be some £90 million and that only a small number of people would be needed to administer the scheme “because most of the administration will be run off the child benefit system and the tax credit system.”11 8. The first Child Trust Fund accounts will mature after 18 years, when, on the figures currently available, the programme costs will have exceeded £4 billion and could be more, depending in part on additional age-related endowments. Projected benefits 9. The document setting out the proposals includes a table, reproduced below, illustrating what the money contributed to Child Trust Funds might be worth after 18 years in real terms (today’s prices). It assumes a nominal fund growth rate of 7% and inflation rate of 2.5% (contributions are assumed to increase in line with inflation). The figures take no account of account charges, or the additional Government endowment at age 7. Table: Illustrative projections for Child Trust Fund growth Nominal rate of return 7%; Inflation 2.5% Initial endowment £250 £500 Value of fund at year 18 in real terms No additional savings £456 £911 £5 per month £2,198 £2,654 £10 per month £3,941 £4,397 £15 per month £5,684 £6,140 £20 per month £7,427 £7,883 £40 per month £14,399 £14,854 Source: HM Treasury and Inland Revenue, Detailed proposals for the Child Trust Fund, Table 3.1, page 11 10.
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