The announcement, part of a total £6 billion of spending cuts, will save the Government about £320 million this year and £520 million a year thereafter. While disappointing, it’s hardly a surprise given the extent that the Government needs to cull its spending.
The changes will be as follows:
1 August 2010
- The £250 government voucher at birth will fall to £50 and the £500 voucher (paid where annual household income is £16,190 or less) will fall to £100.
- All government top-ups at age 7 will cease.
1 January 2011
- All government child trust fund contributions will cease.
The majority of the 5 million children who already have a child trust fund will now lose out by not getting an extra top-up on their 7th birthday. While around 750,000 newly born children a year will lose out from January 2011 by not having a child trust fund.
As for those children born between 1 August and 31 December 2010 the £50 government voucher hardly seems worth the bother. Assuming 6% annual growth it'll be worth £143 when the child reaches 18 - enough to buy a few video games but not much else.
What will happen to existing child trust funds?
They will carry on as normal until the child's 18th birthday, with the exception that government top-up vouchers on a child's 7th birthday will no longer be given from 1 August 2010.
How much will my child lose out?
A child receiving a £250 voucher at birth and a further £250 voucher at age 7 would expect to receive a nest egg of £1,188 at age 18, assuming an annual return of 6% after charges. So, based on this, any children born from next year will typically lose out by around £1,200 in all.
If your child already has the £250 voucher but has a 7th birthday on or after 1 August 2010 then their nest egg would shrink to £714 at age 18 based on the assumptions above. So they’ll typically lose out by around £475 by not receiving the extra voucher.
If you child has already received vouchers both at birth and on their 7th birthday then they’re one of the lucky few who are unaffected by the announcement.
Can I still contribute to my child’s child trust fund?
Yes, contributions of up to £1,200 a year will still be allowed.
What alternatives are there?
The most straightforward options for most parents are a savings account or an investment fund such as a unit or investment trust. Investments can be held in a designated account or bare trust for your child until they reach 18 – see our saving & investing for children page for more details.