One year on from the Child Trust Fund's launch, David White, chief executive of The Children's Mutual, is keen to show advisers, contrary to popular myth, cash is not king in the CTF world.
Wednesday 6th April marks the first anniversary of the UK’s child trust fund (CTF). Some advisers have been turning their back on the CTF, believing the majority of parents are choosing to invest in deposit accounts. But evidence reveals this is simply not the case and the CTF actually offers advisers several long-term earning opportunities.
A catalyst for change
The CTF is already proving to be a significant catalyst for change in the UK's savings market. More than 72% of parents who received their child's vouchers in the first three months of last year have placed them, and there are now more than 1.5 million children with child trust fund accounts.
In just one year, the number of parents regularly saving for their children has increased from 20% to 40% and the average amount they are saving has also significantly increased from £15 per month pre-CTF to £24 today, based on 2004 figures for payment into The Children's Mutual’s tax-exempt friendly society plans.
This is excellent news, but given the CTF is a long-term savings and investment scheme, there is still plenty of room for improvement.
A welcome first step was the additional government top-up of £250 or £500 at age seven, announced in last month’s Budget. To date, around one in 10 of The Children’s Mutual’s CTF applicants has received assistance from a financial adviser. We expect this number to increase, as parents become more familiar with the CTF and aware of the various investment options.
Cash is not king
One fallacy we understand has been putting advisers off the CTF is the number of families investing in cash, or deposit, accounts – in some instances this has been reported as the most popular choice. In fact, one of the great successes of the Child Trust Fund is around 75% of parents have placed their child’s CTF vouches either in a stakeholder (so share-based) or a non-stakeholder equities-based account.
The quarterly figures, released on March 2 by HM Revenue & Customs, give an accurate picture of the whole CTF market for the period to 21 February 2006, with 1.5 million vouchers invested to that date. Comparatively, the Building Societies Association (BSA) figures to the same date showed just 340,000 cash CTF accounts had been opened with its members – equating to 24% of all accounts opened.
Now the HMRC has begun the process of allocating stakeholder accounts for those children whose vouchers have expired, the balance between equities and cash could tip even further in favour of equities.
With the latest Barclays Capital Equity Gilt Survey confirming historically equities have outperformed cash over any 18-year period since 1899, it is important consumers are given the full facts before making decisions about their child’s future. Advisers who help parents understand the pros and cons of investing in equities, versus cash over the long term, open the door to building long-term client relationships with a new kind of investor.
In the 2006 Budget, the chancellor also announced another step which will help make the CTF more appealing – a consultation on a national schools’ ‘Money Week’. Intended to address the low levels of financial literacy in the UK population, this scheme could completely change the way financial advisers work in years to come. We would expect a more financially-sophisticated audience would be more likely to seek advice and be more open to a wider range of products and investment options.
By the next general election, we estimate some 5.5million children will have CTF accounts. Given anyone can pay into a child’s account, the CTF could give advisers an open door to up to 11million parents and 22million grandparents. In the next year alone, a further 750,000 children will receive a CTF voucher – even if advisers tap into a tiny part of this market, the earning opportunities the CTF affords are broad.IFAonline
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